Oil Price Fundamental Daily Forecast – Saudi’s Attempt to Stimulate Demand with Deep Price Cuts to Asia

The U.S. crude oil market is closed on Monday due to the Labor Day holiday, however, there was movement in the cash market overnight. Oil prices fell more than $1 a barrel, hitting their lowest level since July, after Saudi Arabia made the deepest monthly price cuts for supply to Asia in five months as optimism about demand recovery cooled amid the coronavirus pandemic.

Early in the session, U.S. WTI crude oil fell 91 cents or 2.3%. Brent also lost 91 cents or 2.1%.

Saudi’s Cut Prices to Asia

The world’s top oil exporter Saudi Arabia cut the October official selling price for Arab Light crude it sells to Asia by the biggest margin since May. Asia is Saudi Arabia’s largest market by region.

The price cut, scheduled for October shipments, is likely a sign that the world’s biggest exporter may see fuel demand wavering amid flare-ups in the coronavirus.

State oil producer Saudi Aramco is cutting its benchmark Arab Light crude more than expected and lowering the grade to a discount for the first time since June for buyers in Asia. It’s the second-consecutive month of cuts for barrels to Asia. Aramco will also trim pricing for lighter barrels to northwest Europe and the Mediterranean region, Bloomberg reported.

Aramco is reducing pricing to Asia for October shipments of the Light grade by $1.40 a barrel, to 50 cents below the regional benchmark. The company was expected to pare pricing by $1 a barrel, to a 10-cent discount, according a Bloomberg survey of eight traders and refiners.

Saudi Arabia usually sets the tone for pricing decisions by other Middle Eastern suppliers, including Iraq and the United Arab Emirates, the second- and third-largest producers in the Organization of Petroleum Exporting Countries.

Short-Term Outlook

The Saudis had previously supported the rally by raising pricing each month from June to August. However, demand from refineries has softened due to weak profits from turning crude into gasoline and other fuels. Even as economies began to recover, swollen stockpiles – rather than supplies of fresh crude – absorbed much of the increase in demand.

One way to generate demand is to lower prices. Let’s see if it works. If it doesn’t, then OPEC and its allies may have to revisit the idea of gradually increasing production until the end of the year.

With the U.S. summer driving season coming to a close, Washington policymakers failing to pass stimulus legislation and COVID-19 cases still rising, it’s hard to tell where the demand will come from to turn the markets around, however, lowering prices is one way to try to stimulate demand.