Oil prices fell by more than 2% on Monday on sharp price cuts by top exporter Saudi Arabia and a rise in OPEC output, offsetting supply concerns generated by escalating geopolitical tension in the Middle East.

Brent crude slid 2.2%, or $1.74, to $77.02 a barrel by 1024 GMT while US West Texas Intermediate crude futures shed 2.3%, or $1.73, to $72.08.

Both contracts climbed more than 2% in the first week of 2024 on intensifying geopolitical risk in the Middle East after attacks by Yemeni Houthis on ships in the Red Sea.

On Sunday rising supply and competition with rival producers prompted Saudi Arabia to cut the February official selling price (OSP) of its flagship Arab Light crude to Asia to the lowest level in 27 months.

“Oil watchers are rightly questioning that the kingdom’s cut is not only aimed at quelling interference from non-OPEC supply but from its very own cartel membership,” said John Evans, of oil broker PVM.

A Reuters survey on Friday found that OPEC oil output rose in December as increases in Iraq, Angola and Nigeria offset continuing cuts by Saudi Arabia and other members of the wider OPEC+ alliance.

The boost came ahead of further OPEC+ cuts in 2024 and Angola’s exit from OPEC, which are set to lower January output and market share.

“If we were just to focus on the fundamentals, including higher inventories, higher OPEC/non-OPEC production and a lower than expected Saudi OSP, it would be impossible to be anything other than bearish on crude oil,” said IG analyst Tony Sycamore.

“However, that doesn’t take into account the fact that geopolitical tensions in the Middle East are undeniably rising again, which will mean limited downside.”

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Oil prices rise on Middle East tensions

US Secretary of State Antony Blinken held more talks with Arab leaders on Monday as part of a diplomatic push to stop the war in Gaza from spreading further. The conflict has already sparked violence in the Israeli-occupied West Bank, Lebanon, Syria and Iraq, and also led to Houthi attacks on Red Sea shipping lanes.

“The Red Sea tensions are the only counterweight, albeit a relatively weak and intermittent one, to crude prices succumbing to bearishness over expectations of softening global demand and rising inventories,” said Vandana Hari, founder of oil market analysis provider Vanda Insights.

Another price-supportive factor was a force majeure by Libya’s National Oil Corporation on Sunday at its Sharara oilfield, which can produce up to 300,000 barrels per day.