Saudi Arabia plans big oil output hike, beginning all-out price war
GLOBAL IMPACT Saudi output is likely to rise over 10 mn barrels a day in Apr, from 9.7 mn a day in Mar
LONDON/DUBAI: Saudi Arabia plans to increase oil output next month, looking to boost it well above 10 million barrels a day, as the kingdom responds aggressively to the collapse of its The Organization of the Petroleum Exporting Countries-plus (Opec+) alliance with Russia.
The world’ s largest oil exporter started a price war on Saturday by slashing pricing for its crude for foreign markets by the most in at least 20 years, offering unprecedented discounts for buyers in Asia, Europe and the US to entice refiners to purchase Saudi crude at the expense of other suppliers.
At the same time, Saudi Arabia has privately told some market participants it could raise production much higher if needed, even going to a record of 12 million barrels a day, according to people familiar with the conversations, who asked not to be named to protect commercial relations. With demand being ravaged by the coronavirus outbreak, opening the taps like that would throw oil market into chaos.
In the first instance, Saudi production is likely to rise above 10 million barrels a day in April, from about 9.7 millions a day this month, according to people familiar with Saudi thinking. Production limits agreed by Opec and its erstwhile partners expire at the end of the month, opening the way for producers to ramp up output.
“That’s the oil market equivalent of a declaration of war,” said a commodities hedge fund manager, asking not to be named due to the sensitivity of the situation.
The Saudi Energy ministry didn’t respond to a request for comment.
MAXIMUM PAIN
The shock-and-awe Saudi strategy could be an attempt to impose maximum pain in the quickest possible way to Russia and other producers, in an effort to bring them back to the negotiating table, and then quickly reverse the production surge and start c ut t i ng output i f a deal i s achieved.
Brent crude, the global oil benchmark, closed down 9.4% on Friday, its biggest daily drop since the global financial crisis in 2008, settling at $45.27 a barrel.
The production increase and deep discounts mark a dramatic escalation by Prince Abdulaziz bin Salman, the Saudi oil minister, after his Russian counterpart Alexander Novak rejected an ultimatum on Friday in Vienna at the Opec+ meeting to join in a collective production cut. After the talks collapsed, Novak said countries were free to pump-at-will from the end of March.
“Saudi Arabia is now really going into a full price war,” said Iman Nasseri, managing director for the Middle East at oil consultant FGE.
RECORD DISCOUNTS
With jet-fuel, gasoline and diesel consumption rapidly falling due to the economic impact of the coronavirus outbreak, the energy market now faces a simultaneous supply-and-demand shock. Last month, Saudi Arabia not only implemented the Opec+ output cuts, but “voluntarily” restrained its production even further in an effort to lift prices. When the Opec+ deal expires in three weeks, Riyadh will be able to pump as much as it wants.
After the failure in Vienna, Riyadh responded within hours by slashing its so-called official selling prices, offering record discounts for the crude it sells worldwide. Aramco tells refiners each month the price at which it will sell its crude, often adjusting the OSP by a few cents or as much a couple of dollars.
But in a notice to buyers sent on Saturday, Aramco announced it was slashing most official prices by $6-$8 a barrel across all regions. The dramatic move will resonate beyond Saudi Arabia.