Crude Oil Market Plunge Amidst Saudi Arabia's Pricing Strategy

The first week of February 2024 saw a significant drop in Crude Oil prices, defying a recent upward trend. Despite the mounting tensions in the Middle East, particularly around the Red Sea, which were raising concerns about potential disruptions to oil supplies, the market dynamics reversed its trend and followed the bearish market on the week ending on 9th February 2024. The recent drop in Crude Oil prices was attributed to factors, including Saudi Arabia's pricing strategy, concerns about weak demand, and ongoing geopolitical tensions.

In a move that surprised the market, Saudi Arabia announced a decrease in official Crude Oil prices for all regions, including its largest market in Asia. This marked the lowest pricing in 27 months and was attributed to growing internal conflicts within the OPEC+ group. Additionally, concerns about weak demand have further exacerbated the situation. The overall market sentiment pointed towards weakening demand, particularly in the overseas market. This led to a perception of oversupply, prompting a reduction in production output by Saudi Arabia to 9 million barrels per day. Henceforth, the impact on the market was pretty evident as both Brent and WTI Crude Oil benchmarks fell by around 3.3% during the first week of February to stand at USD 74.03 per barrel WTI and USD 79.12 per barrel Brent Crude Oil respectively.

In terms of US Refinery Activity, as per the Energy Information Administration, the US refineries saw a slight decrease in Crude Oil processing, averaging 14.5 million barrels per day compared to the previous week. Moreover, despite the production cut, Crude Oil inventories in the United States rose by 12 million barrels, pushing them slightly below the five-year average for this time of year. Additionally, last week, there was a 5.2-million-barrel increase in the total commercial petroleum inventories. The amount of Crude Oil in the United States' commercial reserve, apart from the Strategic Petroleum Reserve, rose by 12.0 million barrels over the previous week. The United States' Crude Oil stocks, at 439.5 million barrels, are around 2% less than the five-year average for this time of year.

As per ChemAnalyst, the Crude Oil market is expected to revive in the upcoming weeks amidst, the ongoing conflict between Israel and Palestine, coupled with Houthi attacks on the Red Sea passage, continuing to raise concerns about transportation disruptions and potential supply chain issues. These geopolitical tensions, despite their negative impact on Crude Oil supply, could potentially counteract the downward pressure on oil prices caused by weak demand and rising inventories. While the short-term outlook appears bearish, the potential for supply disruptions due to geopolitical instability could provide some support to oil prices in the long run.