Already reeling from a drop in demand due to concerns over the coronavirus, the oil markets took another blow over the weekend as Saudi Arabia and Russia square off in what appears to be an all-out price war.
Oil prices dropped more than 30% after Saudi Arabia and Russia, former partners in the OPEC+ alliance, both announced plans to boost production in the face of slowing demand.
Saudi Aramco, the state-owned oil company, announced massive discounts for oil deliveries in April and said it would also boost production above 10 million barrels per day according to Reuters. It’s believed Aramco could produce as much as 12.5 million barrels per day at full production.
The price cut by Aramco is reported to be the largest in at least 20 years, signalling what Again Capital’s John Kilduff called a “scorched earth approach by Saudi Arabia.”
Russia, in turn, said its companies were free to pump as much oil as they could. Russian Energy Minister Alexander Novak stated “As from April 1st we are starting to work without minding the quotas or reductions which were in place earlier.”
The announcements came after the latest OPEC meeting ended in failure with its members unable to reach an agreement to cut production by 1.5 million barrels per day.
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Russia outright rejected the call to cut production, and the meeting ended with no production agreement in place beyond the end of this month.
With a slowing global economy already dragging down oil prices, the additional threat of an oversupply of oil pushed Brent crude prices down to $35.92/barrel and West Texas Intermediate (WTI) crude to $32.33/barrel Monday morning.
Johannes Benigni, founder and chairman of JBC Energy Group, says we have entered a “world war of oil” and says the price cuts by Saudi Arabia over the weekend were a strategic move. He says the kingdom is “front running the Russians in declaring war on US shale.”
Even worse news for shale producers here in the US, Goldman Sachs says they see oil prices plunging even further, down to as low as $20/barrel in the second and third quarters of this year.
“The prognosis for the oil markets is even more dire than in November 2014, when such a price war last started, as it comes to a head with the significant collapse in oil demand due to the coronavirus” the firm added in a note to clients late Sunday.
Ali Khedery, CEO of strategy consultancy Dragoman Ventures, took to Twitter Sunday night saying “$20 oil in 2020 is coming. Huge political implications. Timely stimulus for nete consumers. Catastrophic for failed/failing petro-kleptocracies Iraq, Iran, etc. may prove existential 1-2 punch when paired with COVID19.”
How long both Saudi Arabia and Russia are willing to keep prices low will be interesting to watch. Saudi Arabia generates 90% of its government revenues from oil production and can’t afford sustained low oil prices.
In Russia, oil revenues account for more than half of its budget revenues and more than 70% of its export revenues. It has been estimated that every $1 drop in the price of oil means a $2 billion loss in revenue.
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Lower prices will haunt other countries as well. Iran counts on oil for more than 80% of its export revenues, and here in the US many shale producers need prices above $60/barrel just to break even.
With many nations dependent on high oil prices to keep their economies afloat, some analysts don’t see the plunge in oil prices continuing.
Adam Crisafulli, founder of Vital Knowledge, says he doesn’t see prices falling much further.
“Saudi Arabia can’t tolerate an oil depression – the country’s fiscal breakeven oil price remains very high, Saudi Aramco is now a public company, and MBS’s grip on power isn’t yet absolute. As a result, the government won’t be so cavalier in sending oil back into the $30s (or even lower).”
The next scheduled OPEC meeting is June 9th.