Saudi Arabia Cuts Oil Prices Amid Slowing Demand and Economic Headwinds

General view of Saudi Aramco's Ras Tanura oil refinery and oil terminal in Saudi Arabia, on May 21, 2018. (Ahmed Jadallah/Reuters)

The Kingdom of Saudi Arabia cut oil prices for clients in Asia and Europe amid sluggish demand and a downturn in the world economy.

Oil prices had its worst start to a year in over three decades, after tumbling by 9 percent in two days.

The world’s top crude oil exporter lowered, on Jan. 5, the prices of all types of crude exports for Asia in February to their lowest level in more than a year due to continuous concerns regarding demand.

Saudi Arabia slashed the price of Asian bound crude for January last month to a 10-month low versus the regional benchmarks after they fell due to signs of low demand for imports in the region.

The cut in Saudi oil prices was widely expected by analysts, generally over concerns about the immediate global demand for oil, particularly in China.

A Reuters survey of analysts predicted, on Jan. 4, that Saudi Aramco would cut its official selling price (OSP) to Asia for February, following the January price reductions.

Saudis Cut Prices Close to Expectations

Saudi Aramco, the state oil company, cut the OSP of its flagship crude, Arab Light, to Asia by $1.45 per barrel, which set the price at $1.80 a barrel above the regional Gulf State benchmark based on Dubai and Oman, Bloomberg reported.

The forecast from Reuters was close to the eventutal price cut for Asia, which predicted a drop of $1.50 per barrel for February.

The premium average rate of the Gulf State benchmark, meanwhile, is the lowest since November 2021, but generally in line with most analysts’ expectations.

Brent crude futures, the international benchmark, has fallen from almost $125 a barrel in June 2022 to less that $80, with prices expected to drop 7.5 percent this week, reported Bloomberg.

High interest rates and a strong dollar have weakened energy consumption among businesses in the United States, Europe, and China.

Kristalina Georgieva, the head of the International Monetary Fund, told CBS’s “Face The Nation,” on New Year’s Day, that she expected one-third of the global economy to enter into recession this year.

“Why? Because the three big economies—United States, European Union, China—are all slowing down simultaneously,” she said.

Oil Futures Expected to Fall

However, crude consumption in China is expected to rise, as its economy reopens after months of strict pandemic-related lockdowns, despite a spike in virus cases.

China, Japan, South Korea, and India are the biggest importers of Saudi crude.

Aramco also reduced OSPs for shipments to northwest Europe and the Mediterranean region, while costs for American customers remain unchanged.

Riyadh sells about 60 percent of its crude exports to Asia under long-term contracts, with pricing reviewed each month, and its decisions are closely followed by other Gulf State producers, such as Iraq and Kuwait.

Many oil traders expect that crude prices will rebound in the second quarter, as China fully opens up and as Russian exports fall due to sanctions and price caps imposed by the West for the invasion of Ukraine, reported Bloomberg.

OPEC+, which is led by Saudi Arabia and Russia, decided to keep crude output steady in December, after decreasing it by 2 million barrels a day in October.

The oil cartel is scheduled to meet again in June, but could convene sooner if prices continue to drop.