Oil Prices Decline Amid Middle East Tensions and Saudi Price Reductions

Oil prices experienced a decline of more than 2% on Monday, primarily influenced by significant price reductions implemented by the leading oil exporter, Saudi Arabia. Additionally, an uptick in Organization of the Petroleum Exporting Countries (OPEC) output contributed to the downward pressure on prices, countering concerns arising from escalating geopolitical tensions in the Middle East.

Brent crude witnessed a 2.2% decrease, equivalent to $1.74, settling at $77.02 per barrel by 1024 GMT. Simultaneously, U.S. West Texas Intermediate crude futures saw a 2.3% drop, amounting to $1.73, bringing the price down to $72.08.

In the initial week of 2024, both Brent crude and U.S. West Texas Intermediate crude futures had experienced a surge of over 2%. This surge was driven by heightened geopolitical risks in the Middle East following attacks by Yemeni Houthis on ships in the Red Sea.

The catalyst for the recent decline in oil prices was Saudi Arabia's decision on Sunday to implement sharp cuts in its official selling price (OSP) for February. The OSP for its flagship Arab Light crude aimed at the Asian market reached its lowest level in 27 months. This strategic move by Saudi Arabia was prompted by an increase in supply and heightened competition with rival producers.

The increase in OPEC oil output for December was attributed to higher production levels in Iraq, Angola, and Nigeria, offsetting the ongoing cuts by Saudi Arabia and other members of the broader OPEC+ alliance. These developments occurred ahead of anticipated additional OPEC+ cuts in 2024 and Angola's exit from OPEC, factors that are expected to contribute to a reduction in January output and market share.

Tony Sycamore, an analyst at IG, highlighted the bearish sentiment driven by fundamentals such as higher inventories, increased OPEC/non-OPEC production, and a lower-than-expected Saudi OSP. However, he acknowledged the impact of rising geopolitical tensions in the Middle East, which could limit the downside for crude oil prices.

U.S. Secretary of State Antony Blinken engaged in diplomatic talks with Arab leaders on Monday, aiming to prevent the escalation of the conflict in Gaza. The ongoing conflict has already led to violence in various regions, including the Israeli-occupied West Bank, Lebanon, Syria, and Iraq, and has triggered Houthi attacks on Red Sea shipping lanes.

Adding to the factors influencing prices was a force majeure declared by Libya's National Oil Corporation on Sunday at its Sharara oilfield, which has a production capacity of up to 300,000 barrels per day. This event served as an additional supportive factor for oil prices.