Markets oil OPEC

In Dramatic Escalation, Saudi Arabia Effectively Declares Oil Price War

You ain't seen nothin' yet. 

On Friday, OPEC+ effectively died after a standoff between the Saudis and the Russians over a proposed massive production cut aimed at stabilizing oil prices ended in acrimony.

In the simplest possible terms, the meeting in Vienna was a bust. Putin looks bent on letting prices fall further in order to cripple US shale, even if that means jeopardizing his clout in the Mideast. “The Kremlin has decided to sacrifice OPEC+ to stop US shale producers and punish the US for messing with Nord Stream 2”, Alexander Dynkin, president of the Institute of World Economy and International Relations in Moscow, a state-run think tank said Friday.

From a geopolitical perspective, the debacle in Vienna marked the beginning of the end for what, in hindsight, will be seen as a short-lived betrothal between Riyadh and Moscow. Oil suffered its largest single-day collapse since 2008 on Friday after the Saudis’ gamble backfired.

Fast forward a day and Riyadh kicked off an all-out price war – or at least that’s what it sounds like.

On Thursday, the Saudis delayed the announcement of official selling prices for the first time in at least ten years, pending further talks with Russia on Friday. The OSPs for April, released on Saturday, betray the biggest cuts in decades and suggest Aramco is prepared to turn up the heat on Moscow.

As Bloomberg details, “Aramco widened the discount for its flagship Arab Light crude to refiners in north-west Europe by a hefty $8 a barrel, offering it at $10.25 a barrel under the Brent benchmark”.

That would appear to undercut Russia’s flagship blend by a hilarious ~$6, in what’s being billed as an effort to effectively cut the Russians out of the European market.

A quick scan of the headlines shows that in addition to the cuts for European refiners, Aramco slashed all official selling prices for Asia in April by $4-$6/bbl and all pricing to the US by $7/bbl.  Those are big adjustments (and that’s a deliberate understatement). Obviously, this has ramifications for everyone else in the Gulf – they’ll likely fall in line.

As a reminder, the existing OPEC+ deal expires next month. On Friday, Russian Energy Minister Alexander Novak told reporters in Vienna that “given today’s decision, all OPEC+ countries from April 1 have no obligations to cut output”.

If you ask the ubiquitous “people familiar with the conversations” who apparently spoke to Bloomberg, Aramco has indicated it may eventually ramp up production to as much as 12 million b/d, but will probably start with an increase from 9.7 million in March to 10 million next month. Between that, and the OSP cuts, this is a major escalation.

In Vienna this week, OPEC angled to convince Russia to acquiesce to a 1.5 million b/d cut through the end of the year (initially, the recommendation was that the deeper cuts would last just through Q2, but after “informal” talks at the Saudi delegation’s hotel, ministers decided that the drastic cuts should in fact last longer).

The Russians didn’t go for it. So, here we are.

And where, exactly, is that, you ask?

Well, according to at least one source cited by Bloomberg, we’re now on the brink of a full-on price war that could see crude drop below $20, although other sources suggested something on the order of $30 is more likely.

Whatever the case, the bottom line on Saturday appears to be that when it comes to recent harrowing declines in crude, you ain’t seen nothin’ yet.

Because now, in addition to an acute demand shock in the form of the coronavirus, we’re on the brink of seeing a massive supply shock too.


 

10 comments on “In Dramatic Escalation, Saudi Arabia Effectively Declares Oil Price War

  1. Wow. Saudis going toe to toe with the Ruskies. Should be fun to watch. For anyone invested in Texas fracking….lookout below. Hope they have good hedges. Might get $2/gal gas in CA again!

  2. This is again a master stroke from Putin which nobody was really predicting. Russia has been preparing for financial problems for years, so presently they are in a very strong financial situation while America and its energy industry is in a very dangerous position. So Putin strikes right at the time when it suits him to push the american oil industry out of business. In addition the world needs low oil prices to save the world economy. So short term pain for Russia to get long term gain. The same applies for the Saudi who are forced to join in to Putin’s way of playing his cards. Great brinkmanship!! Sorry, I work in the oil business, so tricky business…..

    • You might well be right but there is the related question of whether Putin would be happy to see Trump lose the election, which is presumably a touch more likely if your industry is in freefall.

  3. Saudi Arabia is at war with Putin, but also, US frackers. The Saudis are seeking to destroy the US fracking industry. This has major implications for the USA – US Dollar slammed, US GDP slammed, sub-prime bonds slammed, oil price slammed, cats and dogs living together and general mass hysteria in the oil industry. All this happening against a backdrop of the global economy grinding to a halt.

    Next week is going to be very interesting.

  4. US oil production is a strategic necessity. Tarrifs on oil would be an ESG win and an economic support for fragile industry. Bet I’m not the first to think this

  5. The global deflationary impulse is getting stronger by the day. Hold on to your seats, It’s going to be a bumpy ride.

  6. USA is close to self sufficient for oil. Don’t need imports hardly. Oil company CEOs are calling White House for oil tariffs.
    Saudis, those 9/11 guys, will want to negotiate. Fortunately we we have a stabile genius negotiator. Just ask a soybean farmer.

    Twill be interesting.

  7. As of now (13.11, central european time), israel market is down -4.5%, saudi market down -8.x%, Aramco down -8.x%. Monday is gonna be a really fascinating day. It seems an age ago (or a far galaxy away, for yankees) when market where at their 12years ATH, and volatilty was dead. It was 18 days ago.
    We live in interesting times, indeed.

  8. Mr. Oxygen

    Has there ever been a positive reaction by the market when trump provides an initial evocation of tariffs on a market segment? If so what where the primary circumstances.

    Has anyone done the math for the ratio between Each dollar in the rise of oil price from value at Stimulus Two : Each dollar removed per family of the typical 1200 or 2400 check?

    Thanks again.

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