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Saudis plan big oil output hike, starting price war

World's largest oil exporter has slashed pricing for its crude for foreign markets by the most in at least 20 years

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In a notice to buyers sent on Saturday, Aramco announced it was slashing most official prices by US$6-US$8 a barrel across all regions, a decision that affects about 14 million barrels a day of oil exports.

London

SAUDI Arabia plans to increase oil output next month, looking to boost it well above 10 million barrels per day (bpd), 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 US to entice refiners to purchase Saudi crude at the expense of other suppliers.

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 bpd, according to people familiar with the conversations, who asked not to be named to protect commercial relations. With demand being ravaged by the novel coronavirus outbreak, opening the taps like that would throw the oil market into chaos.

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 Organisation of Petroleum Exporting Countries (Opec) 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 did not respond to a request for comment.

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.

Brent crude, the global oil benchmark, closed down 9.4 per cent on Friday, its biggest daily drop since the global financial crisis in 2008, settling at US$45.27 a barrel.

The production increase and deep discounts mark a dramatic escalation by Prince Abdulaziz bin Salman, the Saudi oil minister, after his Russian counterpart Alexander Novak rejected an ultimatum on Friday in Vienna at the Opec+ meeting to join in a collective production cut. After the talks collapsed, Mr Novak said countries were free to pump-at-will from the end of March.

"Saudi Arabia is now really going into a full price war," said Iman Nasseri, managing director for the Middle East at oil consultant FGE.

With jet-fuel, petrol and diesel consumption rapidly falling due to the economic impact of the novel coronavirus outbreak, the energy market now faces a simultaneous supply-and-demand shock. Last month, Saudi Arabia not only implemented the Opec+ output cuts, but "voluntarily" restrained its production even further in an effort to lift prices. When the Opec+ deal expires in three weeks, Riyadh will be able to pump as much as it wants.

After the failure in Vienna, Riyadh responded within hours by slashing its so-called official selling prices (OSP), offering record discounts for the crude it sells worldwide. Aramco tells refiners each month the price at which it will sell its crude, often adjusting the OSP by a few cents or as much a couple of dollars.

But in a notice to buyers sent on Saturday, Aramco announced it was slashing most official prices by US$6-US$8 a barrel across all regions. The dramatic move will resonate beyond Saudi Arabia. The kingdom's pricing decision affects about 14 million bpd a day of oil exports, as other producers in the Persian Gulf region follow its lead in setting prices for their own shipments.

In one of the most significant pricing moves, Aramco widened the discount for its flagship Arab Light crude to refiners in north-west Europe by a hefty US$8 a barrel, offering it at US$10.25 a barrel less than the Brent benchmark. In contrast, Urals, the Russian flagship crude blend, trades at a discount of about US$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. US$30 oil is possible."

Oil traders are looking to historical charts for an indication of how low prices could go. One potential target is US$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 US$20 a barrel.

Brent crude, the global benchmark, fell to a low of US$9.55 a barrel in December 1998, during one of the rare price wars that Saudi Arabia has launched over the last 40 years. BLOOMBERG