Crude Oil continued decline last week as dollar strengthened and the market interpreted the cut to Saudi Official Selling Price (OSP) a bearish indicator that the Kingdom would fight for Asian market share.The Brent-WTI spread has widened from around $5/bbl to just under $2/bbl on strong US economic data on Friday and despite the onset of refinery maintenance in the US. The market’s perception that Saudi Arabia was choosing to preserve market share in Asia with its cuts to its OSP also helped contribute to bearish trends.

- With the market in contango, there is an incentive for the Saudis to push as much crude to Asia for commercial and strategic stockbuilding, under the premise that they are indifferent to what the end-consumer does with the crude, as long as crude sales translate to revenues at present. Asian demand for oil may actually still be robust with winter coming.

- Second, the dollar strength means that the Saudis are, for now, receiving more in petrodollars than they were beforehand and may feel an incentive to keep production higher to maximize those revenues (but the price impact of keeping output higher clearly would lead to lower revenues).

-And then finally, the price cut signals that the Saudis are not willing to take the brunt of what should be a pretty large OPEC cut to align with the new call. Moreover, before the November mark, Saudi Arabia had cut its OSP by $2.30 from July to October, while Kuwait and Iraq cut their OSPs by $2.35 and $2.25. Kuwait and Iraq OSPs have not yet been announced.

The other contributor to the price move this week included the continued appreciation of the US dollar. Related to the Saudi pricing this week, dollar strength means OPEC producers are, for now, receiving more in petrodollars than they were beforehand and may feel an incentive to keep production higher to maximize these revenues (but the price impact of keeping output higher clearly would lead to less revenues.

The overall focus for Brent crude oil is lowwer, Barclays notes. The low close in September through range lows ner 96.75 confirmed the downward trend. Even when priced against the Euro, Brent looks vulnerable to further weakness. "We expect a squeeze lower towards the multi-year lows ner 88.50 in USD terms. Given that momentum indicators on the monthly plot are approaching bearish extremes, we expect the 88.50 lows to provide buying interest and would look for signs of a base. A move above resistance near 97.50/80 in the least is needed to suggest potential for a n interim base."
Source: Barclays