The outcome of the price war will be determined by each side’s ability to inflict damage, but also their ability to absorb it/Bloombergby Bloomberg
Saudi Arabia escalated its oil price war with Russia as the Kingdom’s state-owned energy giant pledged to supply a record 12.3 million barrels a day next month, a massive increase to flood the market.
The supply hike—more than 25 per cent higher than last month’s production—puts Saudi Aramco above its maximum sustainable capacity, indicating that the Kingdom is even tapping its strategic inventories to dump as much crude, on the market as quickly as possible.
Russia responded immediately, with Energy Minister Alexander Novak saying they have the ability to boost production by 500,000 barrels a day. The move would put the Russia’s output potentially at 11.8 million barrels a day—also a record.
Other members of the Organisation of Petroleum Exporting Countries followed in their wake, with Iraq saying it would increase shipments by as much as 350,000 barrels a day next month and Nigeria adding about 100,000 more.
The market is confronted with an unprecedented situation—a huge supply surge combined with a historic demand slump from the coronavirus.
The outcome of the price war will be determined by each side’s ability to inflict damage, but also their ability to absorb it.
Saudi Arabia has greater offensive capabilities, thanks to about two million barrels a day of idle production capacity. The Kingdom can also use its strategic oil stocks to boost supplies at very short notice, according to people familiar with its strategy.
According to Abu Dhabi Commercial Bank, if Brent crude remains at $35 without an adjustment in government spending, Saudi Arabia would run a deficit of nearly 15 per cent of economic output in 2020, while its net foreign reserves could run out in about five years unless it uses other funding sources.
With oil demand rapidly falling due to the economic impact of the coronavirus epidemic, the Saudi production hike, followed potentially by another one from Russia, is likely to force companies to store crude, rather than process it.
The International Energy Agency earlier this week said that global oil demand will contract this year for the first time since the global financial crisis in 2009.
The US and other Western countries are starting to worry about the oil price war between two of the world’s most powerful petroleum nations. In a statemen, the US Department of Energy denounced attempts by state actors to manipulate and shock oil markets.
Similarly, other countries in OPEC+ such as Algeria, Nigeria and the UAE signalled that reconciliation may be a better way forward as the impact of last week’s acrimonious split on the market becomes clear.