Oil declined more than 4% on Monday after Saudi Arabia slashed its prices, raising renewed worries that the market is oversupplied at the same time as demand is weakening.
The West Texas Intermediate futures contract for February lost $3.67, or 4.93%, to trade at $70.17 a barrel. The Brent futures contract for March shed $3.44, or 4.37%, to $75.32 a barrel.
The selloff comes after Saudi Aramco on Sunday sharply cut the price of Arab Light Crude to Asian customers by $2 per barrel.
The Saudi price cut comes amid persistent market weakness due in large part to record U.S. crude production and softening demand in China. OPEC and its allies are cutting their production by 2.2 million barrels per day this quarter in an effort to balance the market.
“While it is 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. Maybe the landing might not be so soft,” Phil Flynn of the Price Futures Group wrote on Monday.
U.S. crude and Brent, the global benchmark, both ended the first week of 2024 more than 2% higher on mounting tensions in the Middle East, but supply and demand concerns have persistently overshadowed geopolitical risks in the market.
“The market seems to feel that geopolitical risk will not impact supply and if it does, demand is weak so it will not matter,” Flynn wrote.
Repeated attacks by Houthi militants, who are allied with Iran, on commercial vessels in the Red Sea have forced shipping giant Maersk to avoid the crucial waterway for the foreseeable future. The situation is also deteriorating in Lebanon, where a Hezbollah commander was killed Monday in an apparent Israeli airstrike.
Analysts say a regional war that draws in Iran could lead to a disruption in the Strait of Hormuz which would have a material impact on the market. So far, however, rising tensions in the region have not led to a disruption in crude supplies.
Meanwhile, the U.S. pumped an estimated 13.2 million barrels per day of crude oil in the last week of 2023, and its inventories of gasoline and distillate both soared by more than 10 million barrels.