Oil price war escalates as Saudi Arabia hikes output

The state-controlled Saudi Aramco oil company said it would supply the market with 12.3m barrels of oil per day in April, a 25% hike on March’s production figure. It is more than Saudi Aramco is able to produce sustainably, prompting speculation Saudi Arabia would dip into its inventories to meet the planned increase.

In February, Saudi Arabia produced around 9.7m bpd.

Alexander Novak, Russia’s energy minister, responded by saying Russia had the ability to boost production by 500,000 bdp, Bloomberg reported. That would take the country’s output to a record 11.8m bpd.

Russia has long been an ally of the Opec oil cartel, of which Saudi Arabia is the de facto leader, and both countries have worked together on previous production curbs.

But when Opec and its allies met last week, initially to discuss how to halt the spread of coronavirus, they failed to agree measures to cut production to shore up the oil price, and relations between Russia and Saudi Arabia collapsed.

In response, over the weekend Saudi Aramco said it would slash export prices for crude. The announcement caused panic across markets and sent oil prices plummeting on Monday to record their biggest one-day drop since the 1991 Gulf War.

As at 1030 GMT on Tuesday, Brent Crude Futures were trading up 6% at $36.49, while West Texas Intermediate was ahead 7% at $33.36. At the start of the month, Brent was trading above $50 and WTI around $47.

Joshua Mahony, senior market analyst at IG, said: “Yesterday’s collapse in global stock markets has been partly reversed in anticipation of a Donald Trump stimulus plan. Oil prices have stabilised, yet the battle between Russia and Saudi Arabia rages as Aramco announces plans to ramp up production by a huge 2.5m bpd in April.

“The huge volatility seen over recent weeks shows little show of abating, with traders having to pick their way through a deadly global virus, a war on oil prices and huge stimulus packages.”

SP Angel said: “As the market searches for a floor, Rystad Energy believes prices will experience extreme levels of volatility in the coming days, and will have to go even lower the current $36 per barrel for Brent. The potential 2mm bpd surplus in the market in the second quarter of 2020 may grow even larger, depending on the production response from Opec and Russia, in our view.

“However, we suspect that the Opec+ alliance could still survive this impasse. Russia has successfully made the point that it is prepared to face the consequence of a no-deal scenario.”

On Monday, Standard Chartered said that a protracted oil price war would weight on oil prices throughout the year. It significantly reduced its forecasts for WTI crude to an average of $32 a barrel in 2020, from an earlier forecast of $59 a barrel.

Goldman Sachs, meanwhile, lowered its second and third-quarter forecasts even further, reducing Brent to $30 a barrel and WTI to $29 in the second quarter and $28 in the third.