‘The market does not need that much crude oil’
Riyadh started an oil price war after Moscow’s refusal to deepen oil cuts
As Russia refused to deepen oil production cuts last week, Saudi Arabia is going to increase its oil output and cut prices as soon as the acting OPEC+ deal on production cuts expires on 1 April. Although neither Saudi Arabia nor Russia rejected the possibility of future cooperation, many analysts do not believe in a rapid rapprochement.
Saudi Arabia is planning to increase oil production to 12,3 million bpd in April, reports The Financial Times adding that the move is a dramatic escalation of a price war caused by the collapse of a production agreement between OPEC and Russia to stabilise the market. This is more than 2,5 million bpd above the kingdom’s current output.
Last week, Russia rejected a Saudi Arabia-led proposal for deeper and more prolonged cuts. In response, the kingdom cut export prices for its crude and said it would raise output. However, the figure of 12,3 million bpd is more than many oil traders were anticipating. Moreover, it is greater than Saudi Arabia’s maximum sustained production capacity, so the kingdom will take barrels from storage to flood the market rapidly in a fight for market share.
According to Olivier Jakob from Petromatrix, Saudi Arabia is pursuing a “shock and awe” strategy to demonstrate it can raise supply faster than any other producer. “Saudi Arabia is going all in on trying to disrupt the oil market,” he said. “Over the weekend, they signalled a price war and now this has gone straight to a volume war. The market does not need that much crude oil. They are dumping the oil from storage.”
Russia’s Minister of Energy Alexander Novak responded to the news of Saudi’s supply increase saying that Russia could also raise production by 500,000 bpd in the “near future”. However, he also said on Russian television on Tuesday that the “doors were not closed” for more future cooperation on oil policy with OPEC countries. According to The Financial Times, Russia does not have the same spare production capacity as Saudi Arabia.
Earlier, Moscow stated that joint production cuts subsidised the US shale industry and helped it to capture market share. The US Department of Energy said on Monday that the US, as the “world’s largest producer of oil and gas, could and would withstand this volatility”.
The oil price war coupled with weak global demand due to the coronavirus crisis triggered one of the biggest one-day price falls in history. On Monday, crude fell by around 30% to nearly $30 per barrel followed by a collapse of global financial markets. Although markets stabilised on Tuesday, traders and oil producers are preparing for a protracted period of lower oil prices, as many analysts do not believe a rapprochement is coming any time soon.