U.S. oil futures post biggest daily drop since November as Saudi price cut raises demand worries

Price action

• West Texas Intermediate crude for February delivery
  CL00,
  +2.01%

  CL.1,
  +2.01%

  CLG24,
  +2.01%
  fell $3.04, or 4.1%, to settle at $70.77 a barrel on the New York Mercantile Exchange. That was the largest one day dollar and percentage decline for a front-month contract since Nov. 16, according to Dow Jones Market Data.

• March Brent crude
  BRN00,
  -0.03%

  BRNH24,
  -0.03%,
  the global benchmark, dropped $2.64, or nearly 3.4%, to $76.12 a barrel on ICE Futures Europe. It marked its biggest dollar and percentage decline since Dec. 12.

• February gasoline
  RBG24,
  +2.52%
  declined by 3.7% to $2.03 a gallon, while February heating oil
  HOG24,
  +3.02%
  lost 1.2% to $2.58 a gallon.

• Natural gas for February delivery
  NGG24,
  +8.29%
  settled at $2.98 per million British thermal units, the highest since mid-November, up 3% for the session after posting a weekly gain of 15%.

Market drivers

State-owned producer Saudi Aramco on Sunday said it would cut its official selling price for crude to all regions, including its largest market in Asia in February. The spread for Saudi crudes, including its flagship Arab light, over local benchmarks will be cut by up to $2 a barrel.

“When a major oil producer like Saudi Arabia offers price discounts, it’s either a sign of concern about weakening demand conditions or an attempt to stop foreign producers such as the U.S.A. from stealing market share away,” Marios Hadjikyriacos, senior investment analyst at XM, said in a note. “Either way, it’s a bearish signal for energy prices.”

Phil Flynn, senior market analyst at The Price Futures Group, said that while it’s “possible that the price reduction was to maintain market share in the face of production cuts, the market is taking it as a clear sign that the economy is slowing.”

Oil bounced last week, finding some support as attacks on shipping in the Red Sea by Iran-backed Houthi rebels operating out of Yemen forced a rerouting of crude and stoked fears of a broader conflict that could further threaten Middle Eastern petroleum flows. The shifts were seen stoking demand for U.S. crude, helping to narrow WTI’s discount to Brent and potentially putting U.S. exports on track to break records, analysts said.

See: Why Red Sea chaos is driving oil buyers ‘into the arms of U.S. shale producers’

For now, overall, oil traders seem to feel that “geopolitical risk will not impact supply and if it does, demand is weak so it will not matter,” said Flynn. 

Meanwhile, a Reuters survey released on Friday showed that production by OPEC members rose in December, with increases by Iraq, Nigeria and Angola offsetting cuts by Saudi Arabia and other members of OPEC+. Angola last month announced it would leave OPEC.

The survey put production at 27.88 million barrels a day, up 70,000 barrels a day from November. Output was down more than 1 million barrels a day from December 2022.

Saudi Arabia and OPEC+ are expected to continue “attempting to balance a supportive price environment while also trying to defend market share against non-OPEC+ producers like the U.S.,” said Robbie Fraser, manager, global research and analytics, at Schneider Electric, in a market update. Those efforts, however, “could be further complicated” by the OPEC+ member output increases seen in the Reuter survey.

Still, analysts said production disruptions in Libya helped lift crude last week and may limit downside.

After protests last week forced Libya to shut the Sharara oil field, Libya’s National Oil Corporation on Sunday declared force majeure at the field, news reports said. The shutting of the oil field saw total Libyan oil output fall from around 1.2 million barrels a day to 981,000 barrels a day on Friday, analysts at ING said.

On Nymex, natural-gas futures settled at their highest since Dec. 13 with several winter storms expected to affect most of the lower 48 states over the next 10 days, said Victoria Dircksen, commodity analyst at Schneider Electric, in a market update.

“The expected winter storms should increase heating demand for natural gas and raise the risk of potential supply-side freeze-offs in core gas-producing regions,” she said.