Saudi Arabia plans to increase oil production next month, well over 10 million barrels a day, as the kingdom reacts aggressively to the collapse of its Opec + alliance with Russia.
The world’s largest oil exporter launched a price war on Saturday by reducing crude oil prices in foreign markets for at least 20 years, offering unprecedented discounts in Europe, the Far East and the United States. United to encourage refiners to buy Saudi crude at the expense of other suppliers.
At the same time, Saudi Arabia has privately said to some market players that it could increase production much more if necessary, even reaching a record 12 million barrels a day, according to people familiar with the conversations, who asked not to be appointed to protect trade relations. As demand is ravaged by the coronavirus epidemic, turning on the taps like that would plunge the oil market into chaos.
In the first case, Saudi production is expected to exceed 10 million barrels per day in April, against about 9.7 million per day this month, according to people familiar with Saudi thought.
“It is the equivalent in the oil market of a declaration of war,” said a hedge fund manager, asking not to be named because of the sensitivity of the situation.
Maximum pain
Saudi strategy of shock and fear could be an attempt to impose maximum pain as quickly as possible on Russia and other producers, with the aim of bringing them back to the negotiating table and then reversing quickly boost production and start reducing production if an agreement is reached.
Crude oil Brent, the world benchmark for oil, closed down 9.4% on Friday, its largest daily decline since the 2008 global financial crisis, standing at $ 45.27 per barrel.
Increased production and large discounts mark a dramatic escalation of Saudi oil minister Prince Abdulaziz bin Salman after his Russian counterpart Alexander Novak on Friday rejected an ultimatum in Vienna at the OPEC + meeting for participate in a collective reduction in production. After negotiations broke down, Novak said countries were free to pump at will from the end of March.
“Saudi Arabia is currently in the midst of a price war,” said Iman Nasseri, chief executive officer for the Middle East for oil consultant FGE.
Record discounts
As jet fuel, gasoline and diesel consumption are decreasing rapidly due to the economic impact of the coronavirus epidemic, the energy market is now facing a simultaneous supply and demand shock.
After Vienna’s failure, Riyadh responded within hours by lowering its so-called official selling prices, offering record discounts for some of the crude it sells worldwide, according to a copy of the prices seen by Bloomberg News. Aramco has set the prices, but official communication to customers is expected on Monday, said a person familiar with the matter.
The Saudi Ministry of Energy did not respond to a request for comment.
Saudi Arabia not only implemented Opec + production cuts last month, but “voluntarily” cut production further in an effort to drive up prices. When the Opec + agreement expires in three weeks, Riyadh can pump as much as it wants.
Aramco tells refiners each month the price at which it will sell its crude, often adjusting the PSO by a few cents or as many dollars. But on Saturday, Aramco told customers that it is reducing official prices from $ 6 to $ 8 a barrel in all regions. This spectacular move will resonate beyond Saudi Arabia. The kingdom’s pricing decision affects around 14 million barrels a day of oil exports, while other producers in the Persian Gulf region follow its example by setting prices for their own shipments.
Become nasty
In the largest move, Aramco extended the rebate for its flagship Arab Light gross to refiners in northwest Europe by $ 8 per barrel, offering it at $ 10.25 per barrel below the benchmark Brent. On the other hand, the Urals, the flagship mixture of Russian crude, is traded at a price of around $ 2 per barrel under Brent. Traders said the Saudi move was a direct attack on the ability of Russian companies to sell crude in Europe.
“It will get nasty,” said Doug King, a hedge fund investor who co-founded the Merchant Commodity Fund. “The Opec + will pump more and the world is facing a demand shock. $ 30 of oil is possible. ”
Oil traders turn to historical charts to find out how low prices could go. A potential target is $ 27.10 per barrel, reached in 2016 during the last price war. But some believe that the market could fall further.
“We are likely to see the lowest oil prices in the last 20 years in the next quarter,” said Roger Diwan, petroleum analyst at consultant IHS Markit Ltd. and Opec veteran, implying that the price could fall below $ 20 per year. barrel.
Crude oil Brent, the global benchmark, fell to $ 9.55 a barrel in December 1998, in one of the few price wars that Saudi Arabia has launched in the past 40 years.