The market took Saudi Arabia’s oil price cut this week as another sign that the kingdom is willing to use pricing as a lever to preserve its market share rather than cut production in what is now an oversupplied market. Even if it was not the intention, some traders took the Saudi move as a sign the kingdom would like falling prices to slow U.S. shale production.
U.S. West Texas Intermediate fell sharply on Tuesday, dipping close to the psychologically key $75-a-barrel level, before closing at a three-year low of $77.19, off $1.59 per barrel. Brent fell along with it to $82.82 a barrel, the lowest settle since October 2010, after Saudi Arabia set a new price in the U.S., 45 cents lower than November's level.
Gene McGillian, Tradition Energy analyst, said the next technical level he's watching for WTI is $74 a barrel and it's not clear how much further it will fall.
"The managed money longs still outnumber shorts 3½-to-1. If this isn't a heavy exodus of the money manager longs, we could still have a significant drop, especially if all these factors that are driving us lower continue to weigh on the markets," he said. "The dollar strength and also fears of slowing economic conditions in Europe and China are still continuing to play a role."
There was initially a muted reaction to the Saudi announcement Tuesday as the market focused on dollar strength and other factors.