Saudi Price Cut Sends Oil Lower
Oil slid to fresh five-month lows as Saudi Arabia made the biggest cut to its flagship crude prices in at least 26 years, the latest sign of a glut in global markets.
West Texas Intermediate futures settled below $69 a barrel, the lowest since late February. Brent crude also ended the session near the lowest in five months.
The kingdom's decision to offer a rare discount on its Arab Light crude added to signals of growing competition as supplies once again flow out of the Persian Gulf. Last month's trading of real-world barrels saw prices plunge as more tankers crossed the Strait of Hormuz.
The Saudi discount follows a weekend move by OPEC+ members to back another modest rise in production quotas for next month, with seven nations led by Saudi Arabia and Russia agreeing to add 188,000 barrels a day. At present, those extra barrels are theoretical, but the group's decision signals a desire to add output as conditions continue to normalize.
Brent crude collapsed by 30% in the second quarter as Washington and Tehran agreed to an interim peace deal, clearing the way for a brisk - even if yet incomplete - resumption of traffic via Hormuz. Against that backdrop, Wall Street banks have forecast that prices have scope to slump further this half, with Citigroup Inc. flagging the possibility of a return to $60 by year-end.
Still, persistent strength in refined products, driven by Ukraine's intensifying attacks on Russian energy infrastructure and tight global refining capacity following the Hormuz shutdown, continued to support the broader energy complex. The spread between the price of a barrel of gasoline and a barrel of crude oil - known as a "crack spread" - is hovering near the highest since June 2022.
In signs of growing near-term market looseness, timespreads for benchmarks Brent and Dubai have flipped into a bearish contango pattern, with nearby contracts at a discount to longer-dated ones. Many grades on the physical market are also cheaper than underlying benchmarks.
Crude oil futures were also hovering in oversold territory on the 9-day relative strength index, typically a signal that prices are due for a rebound.
"Looking ahead, our pricing scenarios continue to point toward subdued positions in crude," said Ryan McKay, senior commodity strategist at TD Securities, referring to commodity trading advisors. However, the systematic traders are likely to boost long gasoline exposure by 9% this week, with heating oil also expected to see additional buying, he added.
Hormuz crossings
A slew of Japan-linked vessels were crossing Hormuz using a route close to Iran on Monday, according to vessel-tracking data compiled by Bloomberg, while traffic through a US-protected corridor showed signs of recovering Sunday. Earlier in the weekend, several vessels had performed unexplained U-turns and detours in the waterway.
Despite increased crossings, shipping through the strait remains risky and several sticking points persist between the US and Iran.
"We think there is minimal appetite for a supply-driven price washout," RBC Capital Markets LLC analysts including Helima Croft said in a note. "Hormuz transits will remain well below prewar levels given the enduring security threats and Iran's insistence on retaining operational control."
Major Persian Gulf producers have been ramping up output at a rapid clip. Among them, Saudi Arabia's exports have already surged close to their pre-war levels as the kingdom gets its tankers through Hormuz. The United Arab Emirates - which quit OPEC during the conflict - also restored flows.
Oil Prices
- WTI for August delivery edged down marginally to settle at $68.55 a barrel.
- Brent for September settlement was 13 cents lower to settle at $71.99 a barrel in New York.
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