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Saudi Arabia plans to increase its crude oil output next month to more than 10 million barrels a day in response to the collapse of its OPEC+ alliance with Russia, Bloomberg News reported on Saturday.
Brent slid to its biggest daily loss in more than 11 years on Friday after Russia balked at OPEC’s proposed steep production cuts to stabilise prices hit by economic fallout from the coronavirus, and OPEC responded by removing limits on its own production, Reuters reported.
“Prices plunged because the OPEC confab ended up being an epic fail on the part of all involved. Russia has clearly decided to employ a scorched earth approach to the oil market: every country for itself,” John Kilduff, partner at Again Capital in New York, told Reuters.
The world’s biggest oil exporter then began a price war on Saturday by slashing the prices it sells crude into foreign markets by the most in at least 20 years, offering unprecedented discounts in Europe, the Far East and the US to entice refiners to purchase Saudi crude at the expense of other suppliers.
At the same time, Saudi Arabia has privately told some market participants it could raise production much higher if needed, even going to a record of 12 million barrels a day, according to people familiar with the conversations who asked not to be identified to protect commercial relations, according to Bloomberg.
Brent futures had their its biggest daily percentage fall on Friday since December 2008, down $4.72, or 9.4 percent, to settle at $45.27 a barrel. It was Brent’s lowest closing price since June 2017.
With demand being ravaged by the coronavirus outbreak, opening the taps may throw oil market into chaos.
Saudi production is likely to rise above 10 million barrels a day in April, from about 9.7 million a day this month, according to people familiar with Saudi thinking, Bloomberg reported.
“That’s the oil market equivalent of a declaration of war,” said a commodities hedge fund manager, asking not to be identified because of the sensitivity of the situation.
Negotiating table
The shock-and-awe Saudi strategy may be an attempt to impose maximum pain in the quickest possible way to Russia and other producers, in an effort to bring them back to the negotiating table, and then quickly reverse the production surge and start cutting output if a deal is achieved, Bloomberg said.
The production increase and deep discounts mark a dramatic escalation by the Saudis after Russia rejected an ultimatum on Friday in Vienna at the OPEC+ meeting to join in a collective production cut. After the talks collapsed, Rusia indicated countries were free to pump-at-will from the end of March.
“Saudi Arabia is now really going into a full price war,” Iman Nasseri, managing director for the Middle East at oil consultant FGE, told Bloomberg.
With jet fuel, gasoline and diesel consumption rapidly decreasing amid the economic impact of the coronavirus outbreak, the energy market now faces a simultaneous supply-and-demand shock.
After the failure in Vienna, Riyadh responded within hours by cutting 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 the official communication to clients is likely to come on Monday, a person familiar with the matter said.
The Saudi Energy ministry didn’t respond to a request for comment from Bloomberg.
Oil traders are looking to historical charts for an indication of how low prices could go. One potential target is $27.10 a barrel, reached in 2016 during the last price war. Some believe the market could go even lower.
“We’re likely to see the lowest oil prices of the last 20 years in the next quarter,” Roger Diwan, an oil analyst at consultant IHS Markit and a veteran OPEC watcher, told Bloomberg, implying that the price could fall below $20 a barrel.
