Oil Falls as Saudi Price Cuts Signal Market Gloom

Oil extended declines after Saudi Arabia lowered the prices of its crude, signaling uncertainty surrounding the supply outlook, while equities slumped in another pressure on the commodity.

West Texas Intermediate settled near $59, sliding around 0.3% on the day after falling in the previous two sessions. Volatility hit Wall Street, also weighing on oil prices.

Saudi Arabia lowered the price of its main oil grade to Asia for December to the lowest level in 11 months. Even though the price cut met expectations, traders saw it as a bearish signal about the cartel’s confidence in the market’s ability to absorb new supply, with a glut widely expected to begin next year.

Prices have given up ground since the US sanctioned Russia’s two largest oil producers last month over Moscow’s war in Ukraine, and abundant supplies have so far managed to cushion the impact of stunted flows from the OPEC+ member to major buyers India and China.

Key price gauges indicate that supply perceptions are worsening, with the premium that front-month WTI futures command over the next month’s contract, known as the prompt spread, narrowing in the past few weeks to near February lows. That’s also true for Brent crude.

Still, US shale companies are forging ahead with their production plans, with Diamondback Energy Inc., Coterra Energy Inc. and Ovintiv Inc. this week announcing they inend to raise output slightly for this year or 2026 despite oil prices falling close to the threshold needed for many US shale wells to break even.

Oversupply gloom hasn’t permeated refined products markets, though. Traders are still assessing how those supplies may be impacted by the US clampdown on purchases of Russian crude and Ukraine’s strikes on its neighbor’s energy assets. Those factors, as well as diminishing global refining capacity, bolstered diesel futures and gasoil futures to the highest since July, lending support to the energy complex.

“Product strength is providing support to crude flat price at the moment,” said Rebecca Babin, a senior energy trader at CIBC Private Wealth Group. “Some of the tightness the market experienced right after sanctions were imposed seems to be dissipating, leaving the spot market well-supplied and softening time spreads.”

Refiners in India, the world’s third-largest importer of crude, are busy trying to diversify their supply sources after Western sanctions made buying discounted Russian oil more difficult and risky. Top processor Reliance Industries Ltd. is seeking to sell some cargoes of Middle Eastern oil to domestic and international purchasers, an unusual move for a refiner that’s normally a major buyer.

The US benchmark has slid 17% this year as increased output from OPEC+ and non-member nations amplifies concerns about a global glut. The boss of commodities trader Mercuria Energy Group Ltd. on Wednesday said that the oversupply is forming slowly, but is likely to be as much as 2 million barrels a day next year.

A recent escalation of tensions between the US and Venezuela, an OPEC founding nation that has seen its output dwindle under the strain of US sanctions, also adds to geopolitical uncertainties. The US currently has no plans or legal justification to execute land strikes on targets in the South American country, CNN reported citing people familiar with a briefing conducted to lawmakers.

Oil Prices

West Texas Intermediate for December delivery fell 0.29% to settle at $59.43 a barrel in New York.
Brent for January dropped 0.22% to settle at $63.38 a barrel.