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Oil Likely To Slump Below $30 On Failure Of OPEC+ And Saudi Indignation


The oil market is staring at bearish headwinds of the sort it has not experienced since the global financial crisis of 2008-09, after talks between oil producers’ group OPEC and its 10 non-OPEC counterparts largely underpinned by Saudi-Russian diplomacy, collapsed in a spectacular fashion at their latest meeting in Vienna, Austria on Friday (March 6).

The meeting was billed as a move to “stabilize” the crude market weighed down by the coronavirus or COVID-19 outbreak that has crippled China; an economy that imports on average 14 million barrels per day (bpd) of crude oil. Since January, the virus has spread, caused deaths and disruption by surfacing in more than 70 countries with major disruptions in Italy, Iran and South Korea.

Faced by unprecedented oil demand destruction, Saudi-led OPEC proposed a deepening of their existing cuts by a further 1.5 million bpd until the end of the year. However, Russia, the biggest of the 10 non-OPEC producers who have signed up to the deal, rejected the move spearheaded by Saudi Oil Minister Abdulaziz bin Salman.

Instead, Russia’s oil minister Alexander Novak declared that participating companies and countries are free to ramp up “idle capacity from April 1”; a day after the expiry of the original deal. And so began the latest race to the bottom of the barrel and bid for market share OPEC and its partners have sacrificed since 2016 in their efforts to provide an oil price floor.

Despite oil futures having slumped by nearly 10%, wasting no time in firing salvos of their own back at the Russians, Saudi Arabia slashed its official selling price (OSP) late on Saturday for April for “all its crude grades to all destinations”, with communiqu├ęs issued by its oil behemoth Saudi Aramco reaching traders from Houston to Singapore.

Apportioned price cuts for lucrative markets in Asia were as high as $4-$6 per barrel and for U.S. importers by $7 per barrel, according an OSP communication shown to your correspondent by traders in Houston, making it the biggest price reduction ever made by Aramco.

“I could not believe what arrived in our mailbox. The price reduction is pretty crazy. It is three times more than our expectation of a $1.75-$2 per barrel cut for the flagship Saudi Arab Light crude grade. It is not on the same page as reductions seen in 2014. Clearly there is indignation within Saudi ranks,” said one source.

In addition, Saudi Arabia also signaled its intention to raise production in April to more than 10 million bpd. If reflected in aggregators’ surveys, it would be the first such instance since May 2010.

If you thought that was all over, Riyadh is promising to increase its production up to 12 million bpd, according four separate sources. In response, Aramco declined comment and the Saudi Energy Ministry had “no one available to comment.”

If the Saudis are aiming for shock-and-awe tactics, expect more carnage over the coming weeks with a price decline to sub-$30 per barrel levels a distinct possibility. When I first wrote about crude oil benchmarks dipping below $30 on Forbes in February predicated on a collapse of OPEC+ and the possibility of demand shrinkage in 2020 for the first time since 2009, many decried it as being alarmist.

But not anymore! Now Wall Street is bending over backwards to slash demand growth forecasts and factoring in distinct possibilities of a demand shrinkage as well. What’s more, there is every indication from trading sources in Houston that they expect prompt prices to fall more than the fluctuations seen in contracts for future months.

In a normal setting, this would result in a widening of contango, i.e. the futures price being higher than the spot price with the market structure encouraging traders to store oil. However, there is already plenty of oil in floating and onshore storage courtesy cargo diversions for crude destined for China but moved elsewhere by those holding out for a reversal in Chinese demand.

For instance, traders such as Trafigura, Glencore and Mercuria as well as the trading division of oil major Total have rented close to 15 million barrels of storage tanks from South Korea’s state oil firm Korea National Oil Corp, according to Reuters. Storage hubs in Malaysia and Singapore are providing similar anecdotal feedback.

Yet, the current backdrop can hardly be described as normal and the last major contango plays of 2014-15 didn’t quite come off for many, and remained “questionable” for others.  What’s more, others within OPEC will ramp up their production as well, and so will the Russians, as the scramble for market share begins in the face of uncertain demand.

Pretty much all of it is predicated on driving U.S. shale and other non-OPEC producers out of business akin to 2014, a case for which is far from clear cut and is happening at a time of a crisis of demand, unlike a supply glut as was the case back then.  

That move ended in a 2016 climb-down by OPEC with pain all around the industry but joy for consumers. However, at a time the coronavirus is seen crippling the global economy, $30 per barrel oil prices would provide a much-needed economic stimulus. If achieved, that stimulus won’t be courtesy leadership but will be delivered courtesy of the belligerence of a dysfunctional producers’ cabal that is driving the oil market to a simultaneous supply and demand shock.

Disclaimer: The above commentary is meant to stimulate discussion based on the author’s opinion and analysis. It is not solicitation, recommendation or investment advice to trade oil and gas futures, options or products. Oil and gas markets can be highly volatile and opinions in the sector may change instantaneously and without notice.

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