*Russia hinted low oil prices for six to 10 years
*Markets are now wagering on output cut by US producers in the range of 1-2 million barrels
Saudi Arabia now intends to raise oil output by about 12.3 million barrel per day, as a response to the breakdown last week an agreement between of the OPEC+ alliance with Russia. Saudi Arabia also cut its export prices by $6 to $8 to encourage buying among refiners. This will definitely trigger a price war in the oil market. Saudi Arabia is preparing for a budget that considers $12-$20 oil. The government is also apprehending an extreme scenario of oil slipping below $10. Kingdom uses its vast reserves to fight for energy market share.
Russia, one of the world’s top producers, also hinted that it could boost output by 500,000 b/d. It also indicated that it could survive with low oil prices for six to 10 years. Russia probably seeks to win back its title of the world’s largest oil producer that it lost to America in 2018. However, Russia is now open to talks. Notably, the current output cut program will expire at the end of March, implying that OPEC+ can produce as much oil as it wants beginning Apr 1. Oil will need to fall to the low $20s to achieve stability.
Yet the move is a gamble for the kingdom, which relies on oil revenues to fill government coffers, and risks alienating more economically vulnerable OPEC peers. Oil prices posted one of the biggest one-day falls in history on Monday, with Brent crude dropping as low as $31.02, prices are down to the level of 2004 April. On Thursday morning Brent crude was trading at $36.48, US crude at $33.63 after dropping 4% in the previous session. Rates to hire large oil tankers have jumped to $85,000 a day, up more than 150 per cent in a week ago.
Pain in the oil patch is expected to aggravate on a host of reasons, ranging from the coronavirus threat, OPEC+ producers’ inability to crack an output cut deal to Saudi Arabia’s announcement of pumping more oil. The liquid commodity slumped more than 20% at the start of the week, recording the worst single-day decline since the start of the first Gulf war in 1991. Meanwhile, the demand side is also shrinking. The International Energy Agency warned that oil demand will likely decline in 2020 for the first time since 2009.
Markets are now wagering on output cut by US producers in the range of 1-2 million barrels per day. immediate announcements of shale production cut strengthened the bet. Goldman Sachs predicts $20 Brent oil with possible dips in prices to operational stress levels and well-head cash costs near $20. Oil prices fell again on Thursday, adding to steep losses in the previous session after the US banned travel from Europe following a declaration that the coronavirus outbreak is now a pandemic.
The push comes as the coronavirus outbreak spreads around the world at a rapid rate, prompting countries from Italy to Iran to take ever more drastic measures like lockdowns to control the spread. Without OPEC+, the global oil market has lost its regulator and now only market mechanisms can dictate the balance between supply and demand.
(Disclaimer: This analysis is only for educational purpose and is not and must not be construed as investment advice. It is analysis based purely on economic theory and empirical evidence. Readers are requested to kindly consider their own view first, before taking any position.) Date: 12-3-2020