CRU: Saudi-Russia Price War Begins as Oil Crashes 30%
LONDON, March 16, 2020 /PRNewswire/ -- The oil market is currently facing a large degree of uncertainty. Oil prices could feasibly remain around $40/bbl for a significant period of time. Three key judgements will determine CRU's oil price forecast for 2020: (I) the extent to which Covid-19 will be successfully contained, which would secure a mild recovery of oil demand; (II) how long can the two antagonists of the oil price war – Saudi Arabia and Russia – hold out; and (III) the resilience of the heavily indebted US shale industry.
Since the turn of the year global oil demand has been destroyed by the impact of the Covid-19 virus. Supply chain disruptions, travel restrictions, quarantined areas in China and now Europe have resulted in multiple downward revisions in global oil demand. The most recent IEA demand forecast is 99.9Mbbl/day in 2020 – 1Mbbl/day lower than their previous forecast. Oil demand is now expected to contract for the first time since the GFC.
In early March all eyes were on OPEC+ to lower production in line with the lower demand driven by Covid-19. In our February Global Economic Outlook (GEO) we stated "OPEC+ will need to cut supply further if it is to balance the oil market…This is essential if it is to get prices back to the desired range of $60-$65/bbl". Instead, Russia refused to cut production until the full extent of the demand impacts are known, it has been argued that they wanted to test the fragility of the US shale industry. In response Saudi Arabia decided to start a price war with Russia. From 1 April Saudi Arabia plans to significantly discount their official selling prices (OSP's) and increase production to as much as 12Mbbl/d– up from an average of 9.8Mbbl/day in 2019 and close to their total production capacity. Other OPEC members will have no option but to also cut the OSP's to make sure they maintain market share.
What does it mean for Saudi Arabia?
Saudi Arabia is currently trying to diversify its economy, through a series of reforms in an attempt to move away from its reliance on oil. To achieve this, and social stability in the region, ironically, they need a high oil price, around the $80/bbl mark. From a simple cost perspective however, Saudi Arabia can sell oil at ~$20/bbl to meet total productions costs - their breakeven price. But in doing so it would be sacrificing its longer- term economic reform agenda.
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