Riyadh's recent decision to go all-in when it comes to removing restraints on oil extraction and offering it at an exceptionally low price of $25 could drastically change the landscape of the crude market. Saudi Aramco is planning to produce 12.3 million barrels per day, a steep rise from 9.7 million under the now-dead OPEC+ deal.
Oil prices have already dropped under pressure from declining global demand due to the COVID-19 outbreak and the excessive oil supply that emerged with the collapse of the OPEC+ agreement. However, according to the estimates of Paul Sankey, managing director at Mizuho Securities, the current price is not the limit, as it could go even lower - below zero.
Paid to Buy
Oversupply as a result of reduced demand is leading to a new headache for all producers – where to store oil that doesn’t have a buyer. Apparently, crude producers are hoping to use their fleets of oil tankers for this purpose, as freight prices have reportedly recently spiked by 700%.
However, even the tanks on board the vessels are not unlimited in their capacity - according to the estimates of analysts at IHS Markit, all oil storage space, including tanks, will be filled with crude within two or three months if demand doesn't increase or supply is not reduced. If such a scenario happens, it is possible that oil companies will do anything to sell their black gold, even if it means paying the buyer, Sankey from Mizuho Securities wrote.
A similar situation was witnessed in Texas in 2018, where shale oil producers started to extract large volumes of by-product gas and were unable to move it outside the state quickly enough due to a lack of infrastructure. Since closing and conserving extra isn't cheap, the producers simply dropped the prices to their lowest, sometimes even paying customers to get the gas, since it was still cheaper than closing wells or storing gas.
Now the global crude market is facing a similar prospect, unless the oil war de-facto initiated by Saudi Arabia comes to an end. The latter, however, might not happen soon.
Not Submitting to Pressure
After the OPEC+ deal collapsed, the head of Russia's Energy Ministry, Alexander Novak, stated that Moscow was ready to continue to adhere to the old deal's conditions, but would not agree to production cuts beyond them, thus essentially discarding Saudi Arabia's offer. Even when Brent prices fell to a level of $31 per barrel, the Russian government didn't change its mind, with President Vladimir Putin saying that Russia would go through a time of turbulent oil prices relatively unscathed and would see its key industries become stronger than before in the process.
At the same time, the spokesman for the Russian president, Dmitry Peskov, stated that a price tag of $25 per barrel would not be a "total disaster", adding that Russia had accumulated certain reserves to get through the difficult situation. He also discarded the notion that the current price dive is the result of a confrontation between Moscow and Riyadh, instead blaming the complicated market situation for the fall.
Who Loses The Most?
As Russia reportedly remains confident about its position in the oil price war, it's unclear how well Saudi Arabia will fare. It has offered large amounts of its oil to European buyers at a low price.
Riyadh will be producing crude at maximum capacity and if something were to happen to the plants when global demand returns, for example due to a new successful attack by Houthi militants, the Saudis might not be able to fulfil their contractual obligations. This, in turn, would lead to fines, something that would be a blow to the Saudi budget, which would already be suffering from the low crude prices.
Another potentially losing side in the ongoing oil war is the US shale oil extracting companies. The costs of their operations are far higher than those of the Russian or Saudi oil companies and a per-barrel price tag below $20 could be below the level of self-sustainment for American producers.
US Senator Kevin Cramer recently called on President Donald Trump to ban the purchase of Saudi and Russian oil in order to defend domestic producers.
"While I support continued dialogue, I believe it is critical to take action now to avoid substantial domestic layoffs, displacement, and financial imports. Today, [Saudi and Russia] expect our producers and workers to absorb these impacts without recourse. We must send the immediate signal; the United States will not be bullied or taken for granted", Senator Cramer stated in a letter to the POTUS.
Trump, however, hasn't indicated any intent to ban foreign oil, which is not surprising since Saudi Arabia is one of the US' key allies in the Middle East and Russia remains a key supplier of so-called heavy oil mixes after Washington imposed sanctions on Venezuela and Iran. Instead, the US president suggested capitalising on the current price dive by filling all the national oil reserves to the max, amassing some 30 million barrels for a rainy day.
Trump also claimed that the oil price war would hit both Moscow and Riyadh hard and promised that the US would get into the war "at the appropriate time".