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Crude oil prices took a tumble of approximately 1% on Monday, following Saudi Arabia’s decision to slash the February selling price of its key Arab Light crude to Asian customers. The move comes amidst a backdrop of burgeoning supply, intensifying competition, and qualms over demand.
Saudi Arabia recalibrates pricing strategy
Front-month Nymex crude (CL1:COM) for February delivery experienced a 1% dip to reach $73.11/bbl, while front-month March Brent crude (CO1:COM) slid by 0.9% to hit $78.04/bbl.
Saudi Aramco (ARMCO) chose to reduce the official selling price by $2/bbl from January levels to a mere $1.50/bbl over Oman/Dubai quotes – the lowest figure seen in over two years. Comparable adjustments were made in northwest Europe and the Mediterranean, with prices dropping $1.50 to $2/bbl in relation to the ICE Brent crude benchmark from January prices.
Global pressures weigh on crude values
At the outset of the year, oil prices seemed poised for an upward trajectory, propelled by escalating geopolitical tensions in the Red Sea. However, Vanda Insights CEO Vandana Hari acknowledges that “The Red Sea tensions are the only counterweight, albeit a relatively weak and intermittent one, to crude prices succumbing to bearishness over expectations of softening global demand and rising inventories.”
Conversely, U.S. oil production has surged to almost record levels, with weekly exports hitting a fresh high last week. The surge in demand for U.S. oil comes as a result of the Red Sea crisis, and the ensuing escalation in costs for shipping companies to redirect their tankers.
U.S. emerges as an appealing alternative
Robert Yawger, energy futures strategist at Mizuho, opines that the “safer and cheaper way to procure supply, especially for EU customers, is to sail the boat to the U.S. Gulf Coast and load up on cheap U.S. (oil) barrels.”
Traders are also keenly monitoring the U.S. government’s oil purchases to replenish the strategic petroleum reserve. While the U.S. has been averaging less than 3M bbl worth of purchases a month, the volume could witness a spike if prices linger below the $79/bbl threshold, thereby amplifying demand and constraining the decline in oil prices.
