Russia's rejection Friday of a 1.5 million barrel per day (bpd) production cut proposal by OPEC has ignited a destructive all-out price war that opens the door to $20 oil. It might even irreparably cripple the power the cartel that has dominated world oil for the past four decades.
OPEC kingpin and lead producer Saudi Arabia Sunday launched the price war by boosting production and offering steep discounts. Market analysts said Saudi Arabia was targeting its discounts to hurt Russia, and punish it for torpedoing the production cuts that would have stabilized world oil prices now hovering below $40 a barrel.
Javier Blas, Chief Energy Correspondent at Bloomberg News, tweeted: "Saudi Arabia is launching the oil market equivalent of a declaration of war: plan for a big production hike, and offering a huge discount for its crude."
On the other hand, Russia sees the price war as a means of boosting its market share. With its daily production of 11.4 million bpd in 2018 accounting for 11% of total world production, Russia is the world's third top oil producer. At the top is the United States with 17.9 million bpd (18% market share) and Saudi Arabia, 12.4 million bpd (12% market share).
Production totals, however, have fallen due to cuts taken since 2019 meant to stabilize sagging oil prices. In Saudi Arabia's case, production was severely reduced by an Iranian drone and missile attacks on two of its largest facilities on Sept. 14, 2019. Production is being restored to the full 12 million bpd capacity. Saudi Arabia currently produces 9.7 million bpd.
Now, Saudi Arabia plans to pump more than 10 million bpd in April while announcing unprecedented discounts of almost 20% in key markets in an undisguised attempt to punish Russia. Saudi Arabia's revenge is also directed at struggling U.S. shale oil producers unable to make money due to their unrestrained production. U.S. shale oil production has massively depressed oil prices, which are down 30% for the year.
The Saudi cuts are unabashedly aimed at reducing Russia's market share. Saudi Arabia this week will announce it will sell its crude to northwest Europe -- one of the top markets for Russian crude -- at discounts to its reference price of more than $8 a barrel compared to March, according to the Financial Times.
Against the U.S., Saudi Arabia will discount its crude by around $7 a barrel in April compared with March. It also made prices cuts to Asia of ranging from $4 to $6 a barrel. Oil industry analysts said monthly price adjustments leave little doubt that Saudi Arabia intends to rob Russia of market share as quickly as it can.
The price cuts threaten will sink international oil prices. Benchmark Brent is already down from $70 a barrel in early January to $45.27 a barrel on Friday. It fell 9% on Friday alone after Russia rejected the OPEC+ deal. U.S. West Texas Intermediate sank more than 10% lower to $41.28, its lowest level since 2016. Traders and analysts previously warned an all-out price war might see oil prices fall to $30 a barrel or lower.
"$20 oil in 2020 is coming," declared Ali Khedery, CEO of U.S.-based strategy firm Dragoman Ventures. "Huge geopolitical implications. Timely stimulus for net consumers. Catastrophic for failed/failing petro-kleptocracies Iraq, Iran, etc - may prove existential 1-2 punch when paired with COVID19."
Goldman Sachs was less pessimistic and predicted a bottom-out price of $35 per barrel in the event of a price war. It also predicted a fall to $40 before a second-quarter average of $42 if nothing changes. Emirates NBD forecasts Brent prices to average $45 per barrel and WTI at $40 "with troughs in Q2 before a tentative recovery over the rest of the year."
"(OPEC+) members look now to be preparing for a price war by announcing plans to actually increase output," wrote Edward Bell, commodities analyst at Emirates NBD. "The outcome is an astonishing reversal of what appeared to be a pending production cut to compensate for the decline in demand caused by the Covid19 (coronavirus) outbreak."
Bell said that should OPEC+ members choose to raise output from the second quarter onward, a wave of oil will be unleashed onto markets. He expects to see Saudi Arabia, the UAE, and other large OPEC producers boost production over the rest of 2020 as they return to a market-share strategy rather than price targeting.
