After experiencing a sharp drop in the previous session, oil futures saw a recovery on Tuesday as traders evaluated ongoing disruptions to Red Sea shipping. The market reaction to Saudi Arabia’s decision to reduce its official selling price to its primary market in Asia and other regions had caused West Texas Intermediate (WTI) and Brent crude to plunge by over 4% and 3% respectively on Monday. This sparked concerns about the strength of demand for oil.
However, on Tuesday, crude prices managed to regain some of their losses. Analysts note that shipping disruptions in the Red Sea, along with fears of an escalation in the Israel-Hamas conflict that could impact Middle Eastern supplies, may help support oil prices. Yet, these efforts could be offset by the record levels of U.S. crude output, exceeding 13 million barrels a day. This surplus in production poses a challenge to Saudi Arabia and its OPEC+ allies in their attempts to increase prices through production cuts.
“While U.S. oil production continues to reach record highs and has the potential for further growth, there is a concern that major producers like Saudi Arabia may choose to defend their market share by increasing pumping or offering deeper discounts,” warns Marios Hadjikyriacos, senior investment analyst at XM.
Given these factors, there is a looming risk of another price war that could keep oil prices under pressure for an extended period of time.