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.