U.S. oil prices tumbled to a fresh two-year low Monday on news that Saudi Arabia cut its selling price for oil to the U.S., suggesting that the kingdom is trying to compete with U.S. shale oil.
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Saudi Arabia raised the prices for its oil in other locations, including Asia, where the country has cut its prices for four straight months.
When the Saudis sharply cut their November selling prices at the beginning of October, oil prices weakened, as the market interpreted the lower prices as a signal that Saudi Arabia was more concerned with maintaining market share than with cutting production to keep prices high.
Saudi Arabia's December prices suggest that while the country isn't trying to undercut its competitors in every region, the Saudis want to maintain market share in the U.S., according to some analysts.
Once the Saudi prices were reported, the structure of the U.S. oil contract shifted to indicate that traders see the market as oversupplied.
Light, sweet oil for December delivery fell $1.76, or 2.2%, to settle at $78.78 a barrel on the New York Mercantile Exchange, the lowest settlement since June 28, 2012.
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Brent initially rose on the Saudi prices but then tumbled alongside the U.S. contract to settle down $1.08, or 1.3%, at $84.78 a barrel on ICE Futures Europe.
Oil prices have plunged in recent months on expectations that a global oversupply would persist and that the Organization of the Petroleum Exporting Countries wouldn't cut output to keep prices high. OPEC's next meeting is Nov. 27.
The coming meeting "was being talked [about] as if it was a price war situation, and I think that talk has loosened up a little bit" based on the new Saudi prices, said Bob Yawger, director of the futures division at Mizuho Securities U.S.A. Inc. However, he said, it remains to be seen whether other OPEC members will follow suit when they release their own December prices.
The U.S. imported 27.7 million barrels of crude oil from Saudi Arabia in August, the lowest level since February 2010, according to the most recent available data from the U.S. Energy Information Administration.
The new prices "will definitely entice some Gulf Coast refiners to at least contemplate going to Saudi barrels, instead of midcontinent barrels," Mr. Yawger said.
However, other analysts said the Saudi prices were more based on supply-and-demand expectations.
"They're betting that winter will come and demand will rise and prices will recover to some extent," said Bill O'Grady, chief market strategist at Confluence Investment Management. "What they did today, I wouldn't read too much into that."
On Monday, the front-month U.S. oil contract settled below the second-month contract for the first time since January, indicating that traders think the market is currently oversupplied and prices could be higher in the future.
"The assumption is, I think, that there's going to be a lot of crude lying about" in the U.S., Mr. Yawger said.
In the Brent market, the front-month contract has traded below the second-month contract since early July.
Traders are also waiting for weekly U.S. inventory data, to be released Wednesday, and the U.S. employment data coming out Friday.
December reformulated gasoline blendstock, or RBOB, fell 3.02 cents, or 1.4%, to $2.1176 a gallon, the lowest settlement since November 2010.
The national average retail gasoline price is $2.98 a gallon, according to AAA. The price fell below $3 a gallon over the weekend for the first time since 2010.
December diesel fell 2.1 cents, or 0.8%, to $2.4899 a gallon.