Saudi Arabia slashes oil prices after collapse of OPEC+

Saudi Arabia slashes oil prices after collapse of OPEC+
There were big falls on Friday as OPEC failed to get a deal with non-OPEC members to extend output deals. (Saudi Aramco photo)
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Updated 09 March 2020

Saudi Arabia slashes oil prices after collapse of OPEC+

Saudi Arabia slashes oil prices after collapse of OPEC+
  • Latest move to deal a major blow to US shale companies

DUBAI: The eyes of the world will be on the oil markets when the big trading hubs in Europe and North America open following the end of the deal between Saudi Arabia and Russia that has helped to sustain crude at relatively high levels for the past three years.

There were big falls on Friday when ministers from the Organization of the Petroleum Exporting Countries (OPEC) failed to get a deal with non-OPEC members — the so-called OPEC+ — to extend output agreements. Brent oil was down nearly 10 percent at $45.27 going into the western weekend.

Saudi Aramco took immediate action to cut prices after the OPEC+ collapse, offering big discounts for crude deliveries from next month, when the current output restrictions end.

According to a notification sent to customers by Saudi Aramco, seen by Arab News, the Kingdom’s oil giant will cut between $4 and $8 per barrel, with the biggest discounts being offered to buyers in northwest Europe and the US.

Roger Diwan, an oil analyst at consultancy IHS Market, said: “We are likely to see the lowest oil prices of the past 20 years in the next quarter.”

West Texas Intermediate, the US oil benchmark, fell to $28.27 in November 2001.

The move raises the possibility of a “crude war” between the three biggest oil blocs — the US, Russia and the Arabian Gulf. Some analysts believe the American shale industry is more vulnerable to low prices than either the Russians or the Saudis.

Robin Mills, head of the Qamar consultancy, told Arab News: “I don’t think this was premeditated but Saudi Arabia has clearly swung quickly into action to put the Russians under pressure. But the Russians, with low debt and a flexible exchange rate, can cope with a few months of low prices.”

The boom in US shale has made the country the biggest oil producer in the world, but with high financing costs. Lower global prices would put a lot of shale companies out of business.

On the other hand, American motorists, and President Donald Trump, would be pleased to see lower fuel prices in an election year. 

In Moscow, one prominent financier with ties to the Kingdom played down the long-term significance of the Vienna fallout.

Kirill Dmitriev, chief executive of the Russian Direct Investment Fund, told Arab News: “Saudi Arabia is our strategic partner, and cooperation between our two countries will continue in all areas. We will also continue to work within the framework of the Russia-Saudi Economic Council.” 

One Russian official, who asked not to be named, added: “There is a good relationship between Alexander Novak, Russian energy minister, and his Saudi counterpart Prince Abdul Aziz bin Salman, and I am sure they will continue talking to each other less formally.”


WEEKLY ENERGY RECAP: Despite long-term challenges, oil prices remain in healthy range

WEEKLY ENERGY RECAP: Despite long-term challenges, oil prices remain in healthy range
Updated 6 min 19 sec ago

WEEKLY ENERGY RECAP: Despite long-term challenges, oil prices remain in healthy range

WEEKLY ENERGY RECAP: Despite long-term challenges, oil prices remain in healthy range

Oil prices have been stable since early January, with Brent crude price hovering around $55. Brent crude closed the week slightly higher at $55.41 per barrel,
while West Texas Intermediate (WTI) closed slightly lower at $52.27 per barrel.

Oil price movement since early January in a narrow range above $50 is healthy, despite pessimism over an increase in oil demand, while expectations of US President Joe Biden taking steps to revive energy demand growth are
still doubtful. The US Energy Information Administration (EIA) reported a hike in US refining utilization to its highest since March 2020, at 82.5 percent. The EIA reported a surprise weekly surge in US commercial crude stocks by 4.4
million barrels. Oil prices remained steady despite the bearish messages sent from the International Energy Agency (IEA), which believes it will take more time for oil demand to recover fully as renewed lockdowns in several countries weighed on oil demand recovery.

The IEA’s January Oil Market Report came as the most pessimistic monthly report among other market bulletins from the Organization of the Petroleum Exporting Countries (OPEC) and EIA. It forecast oil demand will bounce back to 96.6 million bpd this year, an increase of 5.5 million bpd over 2020 levels.

Though the IEA has lowered its forecast for global oil demand in 2021 due to lockdowns and vaccination challenges, it still expects a sharp rebound in oil consumption in the second half of 2021,
and the continuation of global inventory depletion.

The IEA reported global oil stocks fell by 2.58 million bpd in the fourth quarter of 2020 after preliminary data showed hefty drawdowns toward the end of the year. The IEA reported OECD industry stocks fell for a fourth consecutive month at 166.7
million barrels above the last five-year average. It forecast that global refinery throughput is expected to rebound by 4.5 million bpd in 2021, after a 7.3 million bpd drop in 2020.

The IEA monthly report has led to some short term concern about weakness in the physical crude spot market, and the IEA has acknowledged OPEC’s firm role in stabilizing the market.

Controversially, the IEA believes that a big chunk of shale oil production is profitable at current prices, and hence insinuated that shale oil might threaten OPEC market share.

It also believes that US shale oil producers have quickly responded to oil price gains, winning market share over OPEC producers. However, even if US shale oil drillers added more oil rigs for almost three months in a row, the number of operating rigs is still less than half that of a year ago, at 289 rigs.

The latest figures from the Commodity Futures Trading Commission show that crude futures “long positions” on the New York Mercantile Exchange are at 668,078 contracts, down by 18,414 contracts from the previous week (at 1,000 barrels for each contract).