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$30 oil possible in wake of Opec+ disagreement

Dubai - Price war likely; oversupplied market to see more supply as major producers prepare to open their taps

Oil prices are likely to fall further in the coming weeks, and hitting $30 a barrel became more realistic after Opec and Russia failed to agree on production cuts and instead decided to work without minding quotas or reductions.
As a result, analysts say, this will lead to a price war and the oil market, which is already oversupplied, will see increased supply as major Opec producers such as Saudi Arabia and the UAE get ready to open up its taps. Following the collapse of talks between Opec and Russia over the weekend, oil producers are now returning to a market-share strategy rather than price targeting.
Oil prices on Friday plunged 10 per cent after talks ended in Vienna. Analysts in the energy sector have further downgraded their average oil price forecast for 2020, with some projecting crude hitting $30 as a real possibility.
"An inventory blowout in the second quarter could lead to prices declining by more than 50 per cent year-on-year for average Brent that quarter [implying $33 a barrel on average] and struggling to improve considerably thereafter. The market-share strategy bears considerable risk for Opec producers as fiscal positions would deteriorate and balance of payments crises- and questions about the sustainability of monetary policy - re-emerge," said Edward Bell, senior director for market economics at Emirates NBD Research.
Bell expects headline market balances to remain stuck in surplus in for the first three quarters of 2020.
"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," he said.
James Williams, energy economist at WTRG Economics, told Market Watch that if Opec+ doesn't reconsider their decision over the weekend, prices are likely to move into the $30s, but stay above $35.
On Sunday, Saudi Arabia also slashed its official selling price of oil for April.
For the major economies in the Mena region, current production levels are around two million bpd below their peak levels since 2018; there is another 350,000 bpd from non-Mena Opec members. Russia is also producing at around 130,000 bpd below peak levels and the country appears to be explicitly implementing a market-share strategy.
According to the International Monetary Fund, the fiscal breakeven oil price for the UAE is $70 a barrel, $83.60 for Saudi Arabia; $45.70 for Qatar, $87.60 for Oman, $91.80 for Bahrain and $54.70 for Kuwait.
Emirates NBD Research on Sunday revised its oil price assumptions. It now expects Brent prices to average $45 a barrel and WTI at $40 a barrel with troughs in the second quarter before a tentative recovery over the rest of the year.
Bjørnar Tonhaugen, head of oil markets and senior vice-president at Rystad Energy, projected that coronavirus is poised to wipe out most of 2020 oil demand growth with February crude demand dropping by a shocking 4.67 million bpd, led by 2.9 million bpd month-on-month drop in Chinese crude runs.
It has revised down its pre-coronavirus global oil demand growth forecast of 1.1 million bpd in 2020 to 500,000 bpd now if Covid-19 is contained by June 2020.
"At least two million bpd of supply needs to be removed from second quarter balances in order to see a stabilisation in oil prices," said Tonhaugen.
Saudi Arabia to hike output above 10M bpd
Meanwhile, Saudi Arabia, the world's top oil exporter, plans to raise its crude oil production significantly above 10 million bpd in April, after the collapse of Opec's supply cut agreement with Russia, two sources told Reuters on Sunday.
State oil giant Aramco will boost its crude output after the current deal to curb production between Opec and Russia - together known as Opec+ - expires at the end of March, the sources with knowledge of the matter said.
The sources said April's production would be significantly higher than 10 million bpd, possibly closer to 11 million bpd. In the past couple of months, Saudi Arabia has been pumping 9.7 million bpd.
Aramco should maximise its output and sell more crude to protect its market share, the sources said, speaking on condition of anonymity due to the sensitivity of the matter.
Saudi Arabia has an oil output capacity of 12 million bpd, giving it the ability to swiftly increase production. "The kingdom is not at war with anyone, but it is pursuing its own interest. Once the deal expires, everyone will raise production," said the second source.
"You have to follow the OSPs cut otherwise you die in the market," one oil industry at a key Opec producer said.
- waheedabbas@khaleejtimes.com