As Oil Price Tanks What Do Saudi Price Cuts Mean For Crude Markets

Barely a week into the new trading year and oil prices are tanking yet again on Monday (January 8, 2024) driven by an uncertain demand climate and competitive supply-side scenario, especially for light crude grades.

At 11:34 EST, the Brent front-month contract was down 3.73% or $2.94 to $75.82 per barrel, while the West Texas Intermediate (WTI) was trading at $70.48 per barrel, down 4.51% or $3.33.

Essentially many of the bearish permutations that weighed on crude prices in 2023 have spilled over into 2024. Economic fortunes of powerhouses Germany and China remain under a cloud, high interest rate environment will persist and consumer confidence levels will stay rocky.

The International Energy Agency (IEA) puts global demand growth for 2024 in the region of 1.1 million bpd, while the Organization of Petroleum Exporting Countries (OPEC) puts its projection at a more upbeat 2.25 million bpd.

However, the fact remains that both the higher as well as lower demand growth projections can be met by non-OPEC supply growth alone in 2024, turbocharged over the near-term by crude oil producers in the U.S.

Attacks on energy and commercial shipping in the Red Sea by Houthi rebels had edged oil higher in the first week of the trading year. But over the weekend came news from Saudi that turned the crude futures red again.

On Sunday, Aramco – its state-owned behemoth – announced a cut to official selling prices (OSPs) to all regions, including lucrative Asian markets for several grades of the Kingdom’s crude, including its flagship Arab Light.

Riyadh acknowledges competitive market

Cuts in Asia would be as high as $2 per barrel versus the Dubai Oman regional crude benchmark from January levels. Prices for Europe would be down by $1.50-$2 per barrel versus Brent January prices, while North American exports would see a drop of $2 per barrel versus the Argus Sour Crude Index (ASCI) used to benchmark U.S. Gulf Coast sour grades.

The move appears to be a pretty clear attempt at maintaining its market share by Saudi Arabia, especially that of its export of light crude grade to Asia where it is facing competition from U.S. exporters.

It appears that Riyadh may have agreed to cut its production down to 9 million barrels per day as part of OPEC+ cuts, but is also in no mood to let any barrel go unsold at that level.

What can the market read into it?

Firstly, it indicates that Saudi Arabia may not be inclined offer any further “lollipops” to the global crude market in the shape of further unilateral cuts within OPEC+.

Secondly, this development – in concert with market demand fundamentals mentioned earlier and supply scenarios including much higher non-OPEC production in 2024 – cannot be viewed as anything but bearish. That’s even if it likely isn’t a strategic shift from the Saudis in favor of moving higher volumes of crude instead of higher $80-plus prices.

Thirdly, the Saudis have put the rest of OPEC+ on notice for a price war following Angola’s departure from the group and indicated that they would need others to share the pain of any further price supportive oil production cuts.

No wonder crude prices tanked as trading opened in Asia earlier on Monday. However, bottom has not quite fallen off (yet). A modicum of pricing support is being provided by geopolitical tensions in the Middle East.

Having said that, in the absence of any further geopolitical flare-ups or a dramatic reversal in U.S. production levels, overall oil market leanings remain bearish, and point to prices in the region of $70-75 for the first half of 2024 using Brent as a benchmark.

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