Oil prices witnessed a noticeable uptick on Monday, influenced by geopolitical developments and strategic pricing decisions by Saudi Arabia. Brent crude futures rose by 43 cents, or 0.5%, reaching $83.39 a barrel, while U.S. West Texas Intermediate (WTI) crude futures climbed 51 cents, or 0.7%, to $78.62 a barrel.
This price adjustment comes after both Brent and WTI experienced their most significant weekly losses in three months, attributed partly to disappointing U.S. job data and speculation about potential Federal Reserve rate cuts. Last week, Brent crude prices dropped over 7%, and WTI prices fell by 6.8%.
The escalation of conflict between Israel and Hamas has reintroduced a geopolitical risk premium to oil prices. Early hopes for a ceasefire dimmed as Hamas demanded an end to the war in exchange for releasing hostages, while Israel seemed to be preparing for an extensive military operation in southern Gaza, particularly around Rafah. Tony Sycamore, an analyst at IG markets, noted, "News that Israel wants to extend its operation into Rafah risks derailing a potential ceasefire agreement and reigniting Middle Eastern geopolitical tensions."
Adding to the upward pressure on oil prices, Saudi Arabia announced an increase in the official selling prices (OSPs) for its crude oil across Asia, Northwest Europe, and the Mediterranean for June. This decision reflects expectations of robust demand over the summer months.
Concurrently, economic indicators from China, the world's largest crude importer, showed sustained expansion in service sector activity for the 16th consecutive month. The growth in new orders and a positive business sentiment in April bolstered prospects for a continuous economic recovery in China.
In a related development, Saudi Aramco, the kingdom's state oil giant, adjusted its pricing strategy by increasing the OSP of all grades of oil exported to Asia. Arab Light crude for June delivery will see a price increase of $0.90 per barrel, positioning it at $2.90 above the Oman/Dubai regional benchmark. This adjustment signals a tightening supply scenario, according to ING's commodity strategist Warren Patterson.
These price adjustments by Saudi Aramco have stirred expectations of strong summer demand, influencing global oil prices and potentially impacting the profit margins of Chinese refineries. The adjustments could complicate the economic landscape for refineries, especially with forecasts of a dip in diesel demand.
Looking ahead, there is speculation that OPEC might extend its production cuts through the end of the year to stabilize the market. However, some analysts suggest a possible modest reversal in these cuts to prevent loss of market share to non-OPEC producers like the United States, Guyana, and Brazil.
Amid these adjustments, the latest production estimates indicate that OPEC produced 26.81 million barrels per day last month, slightly down from the previous month. Iraq and Kazakhstan, both part of OPEC+, have agreed to address their overproduction following pressure from the group. Iraq reported excess production of approximately 602,000 barrels per day, while Kazakhstan exceeded its quota by 389,000 barrels per day during the first quarter of 2024.
