OPEC Secretary General Mohammed Sanusi Barkindo (L), Saudi Arabia’s Energy Minister Prince Abdulaziz bin Salman (C) and Russian Energy Minister Alexander Novak (R) attend an Opec-JMMC meeting in the UAE capital Abu Dhabi on September 12, 2019.
KARIM SAHIB | AFP via Getty Images
Experts are calling dramatically lower crude prices as major OPEC and non-OPEC producers prepare for an all-out price war, in a sudden U-turn from previous attempts to support the oil market as the new coronavirus hammers global demand.
“$20 oil in 2020 is coming,” Ali Khedery, formerly Exxon’s senior Middle East advisor and now CEO of U.S.-based strategy firm Dragoman Ventures, wrote Sunday on Twitter. “Huge geopolitical implications. Timely stimulus for net consumers. Catastrophic for failed/failing petro-kleptocracies Iraq, Iran, etc – may prove existential 1-2 punch when paired with COVID19.”
The comment came as oil prices are down 30% for the year and a day after Saudi Arabia announced massive discounts to its official selling prices for April. Plunging price forecasts are also coming amid reports of a possible increase in production by the OPEC kingpin from its current 9.7 million barrels per day (bpd) to more than 10 million bpd.
With previously agreed OPEC+ production cuts expiring at the end of March, Saudi Arabia can theoretically pump as much as it wants — up to its capacity of 12.5 million bpd. And Russian Energy Minister Alexander Novak said Friday that essentially the wheels come off next month: “As from 1 April we are starting to work without minding the quotas or reductions which were in place earlier,” he told reporters at the OPEC+ meeting in Vienna, adding, “but this does not mean that each country would not monitor and analyze market developments.”
“Members look now to be preparing for a price war by announcing plans to actually increase output,” wrote Edward Bell, commodities analyst at Emirates NBD, in an analyst note Sunday. “The outcome is an astonishing reversal of what appeared to be a pending production cut to compensate for the decline in demand caused by the Covid19 (coronavirus) outbreak.”
International and U.S. oil benchmarks plummeted to multiyear lows on Friday, with Brent crude closing at $45.27, down more than 9%, while U.S. West Texas Intermediate sank more than 10% lower to $41.28, its lowest level since 2016.
Oil producers shifting to a market share race?
Saudi Arabia’s and Russia’s strategies reveal a shift to prioritizing market share rather than market stabilization and price support. Current production levels in the Middle East and North Africa are about 2 million bpd less than their peak levels since 2018 — which means there’s plenty of room to run if producers decide to open up the taps.
“Should OPEC+ members choose to raise output from Q2 onward, a wave of oil will be unleashed onto markets,” Bell wrote. “We expect to see Saudi Arabia, the UAE and other large producers in OPEC increase production over the rest of 2020 as they return to a market-share strategy rather than price targeting.”
Russia, meanwhile, is pumping some 130,000 bpd below peak levels “and the country appears to be explicitly implementing a market-share strategy,” Bell added.
Inventories will consequentially surge, and as OPEC+ pursues this market share fight, commodities analysts like Bell expect market balances to stay stuck in surplus for at least the first three quarters of 2020.
A supply flood and inventory surge
The impending flood of supply, overwhelmed inventories and coronavirus-led demand shock to a commodity that was already seen as relatively depressed in terms of pricing will inevitably slam those prices further — the question only remains as to how much.
Not everyone shares Khedery’s $20 per barrel oil forecast. Goldman Sachs predicted a bottom-out price of $35 per barrel in the event of a price war, or a fall to $40 before a second-quarter average of $42 if nothing changes.
Emirates NBD forecasts Brent prices to average $45 per barrel and WTI at $40 “with troughs in Q2 before a tentative recovery over the rest of the year.”
Correction: Ali Khedery is CEO of U.S.-based strategy firm Dragoman Ventures. An earlier version misstated the country.