SunSirs: Price Reduction in Saudi Arabia's Triggers Demand Concerns, Crude Oil Prices Plummet by over 4%

On January 8th, international crude oil futures fell. The settlement price of the main WTI crude oil futures contract in the United States was $70.77 per barrel, a decrease of $3.04 or 4.1%. The settlement price of the Brent crude oil futures main contract was $76.12 per barrel, a decrease of $2.64 or 3.4%. The main reason is that Saudi Arabia's comprehensive reduction in crude oil prices has raised concerns about future energy demand in the market, as well as increased production from the Organization of the Petroleum Exporting Countries and its allies (OPEC+), putting pressure on the oil market.

Saudi Arabia's comprehensive reduction in crude oil prices raises demand concerns

Saudi Aramco announced on Sunday that it will lower its official crude oil prices for all regions in February, including its largest market in Asia. The increase in supply has led Saudi Aramco to lower the official selling price (OSP) of its flagship Arab light crude oil to Asia in February to the lowest level in 27 months. The price difference with the local benchmark crude oil will be reduced by up to $2 per barrel.

In addition to the pressure of increased supply, market competition has also led Saudi Arabia to make this choice. Market participants generally believe that Saudi Arabia is trying to prevent the United States and other manufacturers from seizing its market share by lowering prices in order to maintain its market share. This has sparked concerns in the market about global oil demand.

OPEC's crude oil production in December shows an increase

Although OPEC entered a new round of excess production reduction in May and continued to deepen its share of production reduction at the end of November, it has been proven that crude oil production from oil producing countries continued to increase in December.

Last Friday, a survey released by institutions showed that OPEC member countries saw an increase in oil production in December. Data showed that OPEC's oil production in December increased by 70,000 barrels per day from November to 27.88 million barrels per day, a decrease of over 1 million barrels per day compared to the same period in 2022. Iraq, Nigeria, and Angola all showed an increase in crude oil production, offsetting the share of reduced production by Saudi Arabia and other OPEC member countries, which has raised doubts in the market about OPEC's ability to manage oil price expectations. In addition, Angola announced last month that it will withdraw from OPEC, which further exacerbates the difficulty of implementing the organization's policies in the later stage.

US refined oil inventories continue to rise, weak demand suppresses oil prices

According to EIA data from the US Energy Information Agency, as of the week ending December 29th, US gasoline inventories increased by 10.9 million barrels to 237 million barrels, with analysts expecting a decrease of 215,000 barrels. Distillate oil inventories, including diesel and heating oil, increased by 10.1 million barrels to 125.9 million barrels, with analysts expecting an increase of 588,000 barrels. The unexpected increase in finished oil storage has raised concerns in the market about the decline in fuel demand.

In addition, according to foreign sources on January 8th, a preliminary survey released on Monday showed that crude oil inventories in the United States were expected to decrease last week, but distillate and gasoline inventories may increase. On average, the three analysts interviewed expected that as of the week ending January 5th, US gasoline inventories increased by approximately 4 million barrels last week, while distillate inventories, including heating oil and diesel, increased by approximately 4 million barrels.

Geopolitical tensions continue to support the oil market in the short term

At present, the conflict between Palestine and Israel is still ongoing. US Secretary of State Antony Blinken went to the Middle East last week to mediate in an attempt to cool the tension in the region. Antony Blinken held talks with Arab leaders on Monday, as part of diplomatic efforts to prevent the further spread of the Gaza war. But currently, the situation is not as optimistic as imagined. Israel's occupation of the West Bank of the Jordan River, Lebanon, Syria, and Iraq has triggered violent conflicts. More importantly, the attacks by the Houthi armed forces on the Red Sea route are still ongoing. The transportation risks of this route are increasing, and the cost of shipping diversion or pushing up crude oil costs will still provide support for the oil market, This will also balance the pressure of weak global oil demand and rising inventories on the downward trend of oil prices.

SunSirs crude oil analysts believe that the current logic of crude oil trading is still at the supply and demand level, and the supply side is in a tug of war between two forces. Firstly, OPEC's production reduction has been hindered, while US crude oil production remains at a high level, putting pressure on global crude oil supply. Secondly, geopolitical tensions pose certain risks to supply, especially as the expectation of short-term supply disruptions raises the risk premium for crude oil.

On the demand side, the expectation of a slowdown in global energy demand is becoming stronger. Recently, the US economic data has shown strong performance, while employment data is relatively strong. This has lowered the probability of the Federal Reserve cutting interest rates in March, and a high interest rate environment will still be bearish for energy demand. Overall, in the near future, oil prices will continue to operate in a stalemate in the supply-demand game, with both upward and downward breakthroughs being difficult and a high probability of range fluctuations.

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