Saudi Arabian price cuts hurt oil, as US market absorbs Boeing news

The oil price is in focus on Monday, after brent crude prices fell by close to 4% at the start of the week. The driver was Saudi Arabia, who announced cuts to the price of its oil deliveries for February, for all customers, not just customers based in Asia, as it has done previously.

The cuts to the price of oil are up to $2 per barrel in some cases, and this is driving the price of Brent crude back to levels last seen in mid-December. Brent crude is currently below $75.50. Two weeks ago, the oil price was above $80 per barrel due to fears about oil supply and the safety of oil tankers as they travel through the Red Sea. These concerns have not disappeared, and tensions in the Middle East remain. However, the price of oil has not responded with a spike higher. There are a few reasons for this in our view.

Supply:

Monday’s move from Saudi Arabia is a reaction to supply factors. If they want customers to purchase their oil then they have to lower their prices. There is a lot of oil in the market right now, and Saudi needs to remain competitive. Even though Optec has enacted supply cuts, some countries, particularly African Opec + members, have not adhered to the Saudi Restrictions. Added to this, the US is pumping oil at a record pace. The IEA reported that US oil production shattered 20mn barrels per day, which means that US is producing more oil per day than any other country in history, and this is boosting overall oil supply. There is also record production in Brazil and Guyana, along with surging Iranian flows that are expected to have lifted world output by 1.8mn barrels per day last year, with non-Opec oil also expected to drive global supply gains in 2024, according to the IEA. Thus, while Opec is still an important part of the oil market, it is facing existential twin threats from a move towards green energy and supply from non-Opec sources, which could keep a lid on oil prices, which makes $80 per barrel oil look like a distant memory.

Oil demand:

Demand for oil is expected to have grown by 2.3mn barrels per day in 2023, however, demand growth is set to half in 2024 to 1.1mn barrels per day according to the IEA, as global growth slows. Oil demand from Europe has already been revised lower for last quarter, and China’s economy remains in the doldrums, which is also limiting the upside for the oil price.

The Middle East conflict:

The oil market has not been rattled by the tensions in the Middle East, and previous wars between Israel and Hamas have not led to the oil price rising significantly. Thus, even if there is an escalation in the conflict in the coming months, which it appears there will not be, as long as it remains contained, then it should not put upward pressure on the oil price. Added to this, the market has not panicked at the prospect of violence against cargo ships on the Red Sea, largely because of the increase in oil supply as noted above.

The decline in the oil price has weighed on some key FTSE 100 members, including Shell and BP, which are both lower by 1.8% and 1.5% respectively, at the start of the week. The bigger question for markets and the decline in the oil price is the impact on inflation and the global economy. A lower oil price is disinflationary and positive for global growth at the same time, so maybe the soft-landing theory for the global economy is still possible.

Boeing’s woes

Elsewhere, Boeing is down nearly 9%, as the market prices in the news at the weekend that a part of the fuselage blew off mid-flight for a Boeing 737 Max 9 plane. Boeing is extremely lucky that a larger disaster was averted, however, it will raise questions about whether there is a problem with Boeing’s engineering, and if this was a design fault. Investigations are ongoing, and we expect Boeing’s share price could come under even more downward pressure if a design fault is discovered. If this incident is discovered to not be Boeing’s fault, then we would expect the share price to rise, but it could be some time before this can be ruled out. Airbus, Boeing’s European rival, is capitalising on its woes, and is up more than 2% so far on Monday.

Airlines that use Boeing planes are also seeing stock market weakness on Monday, along with some of Boeing’s suppliers, for example, Alaska airlines is down more than 4%.

For now, Boeing is weighing on the performance of the Dow Jones, which is currently down by 0.5%, while a recovery in the tech giants in the US on Monday, is helping the Nasdaq to recover.