Saudi Arabia dramatically cut its official selling prices (OSPs) for February crude oil sales to Asia on Monday, reacting to weakening demand and increased competition, according to trading sources. This steep price cut highlights growing concerns about a potential global economic downturn this year.
Saudis Slash Asia Prices by Most Since Early 2021
State oil giant Saudi Aramco has set the February price for its flagship Arab Light crude at $1.80 a barrel versus the Oman/Dubai average, down $2.20 from the previous month, according to a statement from the company. This is the steepest cut since January 2021.
Saudi Arabia also reduced prices for other grades shipped to Asia and other regions including Europe and the United States. The price cuts were larger than what refiners had expected.
|Price Cut to Asia
|-$2.20 per barrel
|-$2.30 per barrel
|-$2.60 per barrel
The deep price reductions reflect worries about oil demand during the current economic slowdown, particularly in China which is seeing a surge in COVID-19 infections after abruptly easing anti-virus measures last month.
“The large Saudi price cuts reflect signs of weakening oil demand amid an increasingly uncertain global economic outlook,” said Edward Moya, senior market analyst at OANDA.
Oil Prices Sink Over 4%
Oil prices slumped by over 4% on Monday in reaction to the Saudi price cuts.
Brent crude futures dropped $2.57, or 3.1%, to settle at $79.65 a barrel after earlier falling to $78.75, their lowest since December 26.
Meanwhile U.S. West Texas Intermediate crude fell $2.62, or 3.7%, from Friday’s close to $77.90 a barrel. During the session WTI slid as low as $76.30, its lowest since December 21.
The Saudi pricing news overshadowed supply concerns such as potential European bans on Russian products. It also offset the threat to exports from Russia’s invasion of Ukraine and Middle East tensions.
Weak Demand Outlook Behind Aggressive Cuts
The substantial Saudi price reductions indicate the world’s largest oil exporter sees demand worsening as more countries head into recession or experience much slower growth.
China’s crude imports plunged in December as surging COVID-19 infections and travel curbs weakened demand. For all of 2022, Chinese imports sank 2.9% from 2021’s record highs.
“Worries over slowing global growth are front and centre for the market despite tight inventories,” said Vivek Dhar, a commodities analyst at Australia & New Zealand Banking Group Ltd.
Saudi Aramco may also be responding to signs that Russian fuel is flowing back to Asia after being shunned due to sanctions over Moscow’s invasion of Ukraine. Increased oil exports from Iran could be materializing soon as well if it’s able to revive a nuclear pact with world powers.
Russia is offering Asian buyers steep discounts likely below the levels that Saudi Arabia considers acceptable. The Saudis seem inclined to retake market share after losing ground to discounted Russian supplies last year.
“The Saudis have signalled that they will provide price incentives to buyers to regain market share against competition from Russian oil,” according to Kpler analyst Viktor Katona. He expects a “ping-pong” dynamic as Saudi Arabia and Russia aim to undercut each other.
|Saudi v Russia Share of China Crude Imports
So far there are no clear signs of demand improvement in China or indications that its crude buying will rebound strongly after falling last year for the first time since 2001, according to traders.
Beijing has prioritized economic growth by relaxing COVID rules so analysts expect some recovery. But surging infection levels may limit mobility and oil use for longer than expected.
Saudi Action Reflects Deteriorating Market
Saudi Arabia typically cuts prices when demand is softening and leaves pricing steady or raises it when consumption looks more robust. So it’s previous price hikes for October through January shipments suggested confidence at that time about the strength of the global economy and energy demand.
The substantial price decreases for February indicate Saudi officials have substantially dimmed their view of market strength. It illustrates how worried traders have become about the economic landscape just in the past two months.
Fereidun Fesharaki of consultant FGE said the Saudis “may be anticipating negative reaction in oil demand, signaling that oil markets in the first quarter could be in worse shape than earlier thought.”
In December, OPEC+ originally intended to maintain steady deep production cuts through 2023 in light of economic uncertainties. Demand has apparently softened even quicker than those worries implied, given the scale of the Saudi price reaction.
So while OPEC+ nations plan to gather in early February to set supply policy, they may decide more output restraint is now needed to prevent an oil price rout.
Forecasts See Much Lower 2023 Average Price
In forecasts issued last week, crude price projections for this year have already been revised lower across the board on worries that the global economy will be significantly weaker than earlier hoped.
|2023 Brent Price Predictions
These downgrades are due to the grim outlook for oil use as China contends with widespread COVID cases across its massive population. Europe and North America face possible recessions or very anemic growth at best.
So crude benchmarks that averaged near $100 per barrel last year are now expected to average $10-12/bbl less in 2023 by many Wall Street banks. But those forecasts came before the severe Saudi price cuts highlighting just how worried the top oil exporter has become.
Additional downward revisions seem imminent given the Saudis seem so concerned about eroding consumption amid a darkening macro picture. Monday’s price slash adds to existing evidence of an oversupplied oil market going into recession worries.
Morgan Stanley analyst Martijn Rats summed up the shifting tone: “Given signs that demand is likely to disappoint relative to lofty expectations, risks remain skewed to the downside.”
So the substantial Saudi price reductions signal officials in the world’s biggest petroleum exporting nation already see the likelihood of much weaker than expected consumption plus too much oil and product supply.
Saudis Protect Downside But Upside Limited on Growth Fears
The kingdom has now adjusted export prices to defend $80 Brent but seems resigned that triple digit crude is unlikely with so many challenges to demand, at least in the first half of 2023.
ANZ analyst Vivek Dhar said oil below the important $80 support level may be possible in coming weeks if growth keeps slowing hard coupled with strong supply availability. “There’s downside risk here in the short term,” he noted.
So Riyadh moved to try to put a floor under sliding oil markets which have given up all the geopolitical risk premium built in when Russia invaded Ukraine 11 months ago.
But the Saudis are also acknowledging via drastic price cuts that economic risks now outweigh supply disruption worries, capping recovery potential for energy markets this year.
Without clear sparks for demand growth, upside for oil seems restricted despite very tight crude and fuel inventories currently. Recession forces overshadow the market’s extremely bullish fundamentals.
So Monday’s deep Saudi price reductions for Asian buyers admit that global oil demand could struggle badly as soaring interest rates, high inflation and other drags unleash economic turmoil.
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