Oil Prices Forecast: Bearish Winds Driven by Saudi Price Cuts

Key Points

• Saudi price cuts hint at weaker demand
• OPEC, non-OPEC production rise fuels bearish trend
• U.S. drilling increase signals future supply growth

Crude Opens Week Under Pressure

As trading began on Monday, oil prices were already on the decline, dropping over 1%. This decrease can be attributed to Saudi Arabia’s decision to cut prices and a reported increase in OPEC’s production output.

At 05:48 GMT, March Brent crude oil is trading $77.72, down $1.04 or -1.32%, and March West Texas Intermediate (WTI) crude oil is at $72.83, down $1.03 or -1.39%.

Saudi Arabia’s Price Cut Impact

This week commenced with Saudi Aramco announcing a reduction in its February Official Selling Prices (OSPs), sending ripples through the oil market. The price of Arab Light crude to Asia was notably cut to its lowest in over two years, signaling a response to a perceived dip in demand.

Mixed Fundamentals

Focusing on the fundamentals at the start of the week, the oil market appeared bearish, influenced by factors like rising inventories and increased output from OPEC and non-OPEC producers. The drop in Saudi OSPs further emphasizes this bearish trend. However, this outlook is tempered by geopolitical tensions in the Middle East, which could limit the decline in oil prices.

Geopolitical Tensions’ Role

The geopolitical situation, particularly in the Middle East, remains a critical factor to watch. Developments such as Yemeni Houthis’ activities in the Red Sea and statements from U.S. and Israeli political figures are essential in assessing the market’s direction.

OPEC Output and US Drilling Data

OPEC’s output in December registered a slight increase of 70,000 barrels per day (bpd), totaling 27.88 million bpd. This increase reinforces the bearish sentiment in the market by potentially contributing to an oversupply. In parallel, U.S. oil drilling data shows a rise in rig counts, indicating a likelihood of future supply expansions, which could further exert downward pressure on oil prices.

Short-Term Forecast: Bearish

Considering the week’s developments so far, the short-term outlook for oil prices is bearish, influenced by Saudi Arabia’s price cuts and OPEC’s output increase. However, ongoing geopolitical tensions could provide some upward pressure, creating a mixed yet predominantly bearish market environment.

Technical Analysis

Light Crude Oil Futures currently trade at $72.65, slightly below the 50-day moving average of $75.53 and significantly under the 200-day moving average of $76.64. This positioning below both key moving averages suggests a bearish trend.

The drop from the previous day’s close of $73.81 reinforces this outlook. Considering the minor support at $72.48, the current price is hovering near this level, indicating a critical juncture. If it breaks below, it may approach the main support at $66.85.

Overall, the market sentiment appears bearish, with a focus on whether the minor support can hold to prevent further declines. This downtrend is expected to continue as long as the market remains below the 50- and 200-day moving averages. They are the key trend indicators.