[Bloomberg] Saudis Plan Big Oil Output Hike, Beginning All-Out Price War
Saudi Arabia plans to increase oil output next month, looking to boost it well above 10 million barrels a day, as the kingdom responds aggressively to the collapse of its OPEC+ alliance with Russia.
The world’s largest oil exporter started a price war on Saturday by slashing pricing for its crude for foreign markets by the most in at least 20 years, offering unprecedented discounts for buyers in Asia, Europe and the U.S. to entice refiners to purchase Saudi crude at the expense of other suppliers.
Gotta make up for the loss of all those Hajj $$
At the same time, Saudi Arabia has privately told some market participants it could raise production much higher if needed, even going to a record of 12 million barrels a day, according to people familiar with the conversations, who asked not to be named to protect commercial relations. With demand being ravaged by the coronavirus outbreak, opening the taps like that would throw oil market into chaos.
LOLGF Iran
In the first instance, Saudi production is likely to rise above 10 million barrels a day in April, from about 9.7 millions a day this month, according to people familiar with Saudi thinking. Production limits agreed by the Organization of Petroleum Exporting Countries and its erstwhile partners expire at the end of the month, opening the way for producers to ramp up output.
“That’s the oil market equivalent of a declaration of war,” said a commodities hedge fund manager, asking not to be named due to the sensitivity of the situation. The Saudi Energy ministry didn’t respond to a request for comment.
MAXIMUM PAIN
The shock-and-awe Saudi strategy could be an attempt to impose maximum pain in the quickest possible way to Russia and other producers, in an effort to bring them back to the negotiating table, and then quickly reverse the production surge and start cutting output if a deal is achieved.
GETTING NASTY
In one of the most significant pricing moves, Aramco widened the discount for its flagship Arab Light crude to refiners in northwest Europe by a hefty $8 a barrel, offering it at $10.25 a barrel less than the Brent benchmark. In contrast, Urals, the Russian flagship crude blend, trades at a discount of about $2 a barrel less than Brent. Traders said the Saudi move was a direct attack at the ability of Russian companies to sell crude in Europe.
“This is going to get nasty,” said Doug King, a hedge fund investor who co-founded the Merchant Commodity Fund. “OPEC+ is going to pump more, and the world is facing a demand shock. $30 oil is possible.”
Oil traders are looking to historical charts for an indication of how low prices could go. One potential target is $27.10 a barrel, reached in 2016 during the last price war. But some believe the market could go even lower.
“We’re likely to see the lowest oil prices of the last 20 years in the next quarter,” said Roger Diwan, an oil analyst at consultant IHS Markit Ltd. and a veteran OPEC watcher, implying that the price could fall below $20 a barrel. 
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