Saudi Arabia’s salvo will come into effect in April and will put Russian ESPO crude to Asia under significant price pressure and hurt US shale producers.
Russia responded Monday by emphasizing its domestic economy could withstand oil prices
falling to $25-$30/b and said it would maintain its share of the global oil market even as the ruble hit a four-year low against the dollar.
The impact on US shale is already being felt. Diamondback Energy
and Parsley Energy
on Monday became the first two of what could eventually be a horde of oil operators to slash activity, with cuts to capital budgets and output growth also possible.
This all comes as the market tries to calculate how much and how quickly crude comes gushing back.
S&P Global Platts Analytics sees a reasonably aggressive response from Saudi Arabia as ramping up output to 10.25 million b/d in the second quarter from 9.75 million b/d in the first three months, but the country go much bolder in April as it lays down the gauntlet. Russia, meanwhile, could add another 300,000 b/d with the Gulf producers adding up to 500,000 b/d.
Then there are the wild cards. This includes Libya, which could bring on 1 million b/d in output should it resolve its internal political conflict and the Partitioned Neutral Zone shared by Saudi Arabia and Kuwait that could add another 500,000 b/d in capacity this year. And output remains mostly dormant in sanctions-hit Iran and Venezuela, wiping 3 million b/d off the market.
It’s not just a question of how low oil prices
go but also how long it lasts, if you are an independent shale producer or even an oil major. While the former is more flexible, they are also more exposed, with independent energy expert Anas Al-Hajji saying, “If this oil price rout stays until June, shale oil production will drop like a rock.”
But even oil majors will struggle if oil prices
remain well below $50/b for many months.
Oil prices have almost halved in value since the start of the year. S&P Global Platts' key Dated Brent benchmark on Monday fell below $40/b for the first time since April 2016, just a day after falling below $50/b. But while analysts queue up to explain why the price of Brent will head toward $20/b even without an extra drop of crude being supplied, at some point lower prices will help revive demand.
Indeed, the main beneficiaries are likely to be the main consuming countries such as India and China, but even there oil companies will be affected.
Moreover, without the floor in the market being provided by the OPEC+ producers, the oil market could return to greater volatility, with greater swings in price.
Lower oil prices could also change the conversation in energy transition, increasing demand for oil products and slowing the penetration of electric vehicles.
Maybe only the pain of lower oil prices falling below $30/b will be enough to bring Saudi Arabia and Russia back together like it did in 2016, when they agreed a historic deal. But maybe with US shale not in the same health as back then, the case for a head-on battle will hold greater sway. Either way, oil competition and oil alliances may never be the same again.
Disclaimer: London-based Paul Hickin is associate director at S&P Global Platts. Views are his own