SAUDI ARABIA – Saudi Arabia has said that it will ramp up its output to above 10 million barrels per day (bpd) and further slash the cost of its own crude oil in April.
The decision was made after a meeting of OPEC+ failed to agree on further oil cuts.
A report by Reuters described the decision by Saudi Arabia as a detonation of a metaphorical nuclear weapon in the global oil market.
The OSP for Saudi Aramco’s benchmark Arab Light grade was cut by $6 a barrel for Asian customers, the destination of about two-thirds of the kingdom’s exports.
This was the largest monthly cut in Refinitiv records stretching back to 2003.
The OSP was cut to a discount of $3.10 a barrel to the Oman/Dubai average for April, down from a premium of $2.90 for March cargoes.
It wasn’t just Asian refiners getting a massive price cut. The Saudis slashed the Arab Light OSP for Northwest Europe by $8 a barrel to a discount of $10.25 a barrel to Brent, and the United States got a reduction of $7 a barrel to a discount of $3.75 against the Argus Sour Crude Index.
Saudi Arabia’s decision would blow up the already tumbling oil prices and strain trade relationships between Saudi Arabia and other oil producing countries.
“The Saudi move was no shot across the bows aimed at Russia’s reluctance to extend and boost a deal to curb production. Instead, it was a full-on declaration of war,” read the report by Reuters.
The prevailing logic, according to Clyde Russell, was that the Saudis wanted to send a message to Russia: Extending and increasing output restrictions would have been a good idea, and that it would have been in all the producers’ interests to make this happen.
Apart from the decision being seen as one directed at Russia, some analysts believe that Saudi Arabia may also be trying to curtail U.S. shale oil output, hoping price weakness forces producers into losses and the idling of drilling rigs.
Given that Saudi Arabia’s current output is around 9.7 million bpd, the ramping up of oil means that as much as an extra 1.3 million bpd could flood the market next month.
This is despite demand for oil taking a major hit from the economic fallout of the global coronavirus epidemic.
Evidence that this will work is however patchy as a previous attempt to crush shale producers in 2014 failed to achieve its purpose and instead led to the OPEC and allies agreement in 2017.