Crude oil price outlook after Saudi Arabia’s price hikes

Crude oil price is back up above $70 per barrel as the market reacts to Saudi Arabia’s decision to hike its official selling prices to customers in Asia and the US. Despite the recent plunge, most analysts have maintained a bullish outlook.

Saudi’s price hike

Over the past two weeks, crude oil price has been on a decline amid heightened concerns over global demand. Investors have been anxious about the severity of the Omicron variant and its impact on the oil market during the holiday season. However, the decision by Saudi Arabia to increase prices has increased optimism on the commodity’s demand.

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On Sunday, the state-won oil producer – Saudi Aramco – announced that it will increase prices for all crude oil grades shipped to the US and Asia in January. For customers in Asia, the Arab Light grade is up by 60 cents from December’s $3.30 per barrel above a benchmark. Notably, this is the highest figure since the coronavirus pandemic hit in February 2020.

In the US, prices will increase by 40 – 60 cents. However, Aramco has reduced is prices for its European customers. Nonetheless, the latter constitutes a rather small market for the leading oil producer.

Saudi Arabia is the leading exporter of oil worldwide. It ships over 60% of its output to Asia with India, South Korea, China, and China being some of its key consumer. Besides, Aramco’s official selling prices (OSPs) are usually a bellwether for the oil market. As such, it often sets the trend for crude oil price in the Middle East and other regions.

Analysts’ outlook

In the past week, the producer’s CEO Amin Nasser indicated that the market was overreacting to the Omicron variant. His sentiments are similar to those of other analysts.  For instance, Goldman Sachs sees “very clear upside risks” to its prediction that Brent futures will average at $85 per barrel in 2023.

In a note, the investment bank’s Head of Energy Research & Senior Commodity Strategist. Damien Courvalin highlighted that the market is looking at the worst-case scenario.

According to the analyst, the fundamentals would only support the recent decline in crude oil price if the Omicron variant was half as severe as the situation observed in Q2’20. The other extreme cases that could validate the plunge are if no plan flied for a span of three months or if the pandemic got worse than it was prior to the approved vaccinations.