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US, Russian oil producers to feel the squeeze as Saudis open oil tap: analysts

Drillers with higher costs will suffer while Saudis - who have lowest average production cost - ride out low prices

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The reduced fuel demand from the global Covid-19 outbreak is amplifying the effect of the Saudi supply surge.

New Delhi

SAUDI Arabia's sudden lurch to aggressive discount exporter from chief cheerleader for output restraint is set to upend global oil trade flows and bring harsh financial pain for higher cost rivals such as Russia and the United States, analysts said.

At least four refiners in Asia have already signed up for maximum volumes of newly-cheap Saudi crude since the kingdom slashed export prices and signalled an output boost over the weekend after the collapse of the Opec+ deal. Other Middle Eastern producers are expected to follow suit.

More buyers of heavily-discounted Saudi oil are expected to emerge in Asia, the top consuming region, even as fuel demand remains depressed by the novel coronavirus outbreak, which analysts say will lead to lower crude imports from higher-cost suppliers.

"Higher Middle Eastern oil production and lower prices will enhance choices and give tough competition to crude from other parts of the world like Russia and the US," said R Ramachandran, head of refineries at Bharat Petroleum Corp Ltd.

Brent crude oil prices are set for their biggest one-day percentage drop since the first Gulf War in January 1991, and dropped on Monday to their lowest since February 2016.

Saudi Arabia's aggressive turnaround comes after Russia, the world's second-largest producer, baulked on Friday at output cuts proposed by the Organisation of the Petroleum Exporting Countries (Opec) producers to stabilise falling prices caused by the economic fallout from the Covid-19 outbreak.

"Enhanced supplies from the Middle East will knock out latest entrants in the game, like the US and some of the Russian oil supplies to new markets like India," said Sri Paravaikkarasu, director for Asia oil at consultancy FGE, referring to recent increased purchases of US and Russian oil by Asian refiners.

The Saudis are deemed able to weather low oil prices better than other producers as they have the lowest average production cost. But drillers with higher costs, such as in the United States, are expected to suffer amid any full-blown price war, analysts said.

"Such price levels will start creating acute financial stress and declining production from shale as well as other high cost producers," analysts from Goldman Sachs said in a note, adding that shale output could fall by as much as 250,000 barrels per day in the year's fourth quarter. The bank also slashed its second- and third-quarter Brent price forecasts to US$30 a barrel.

While lower oil prices typically boost consumption, the spreading global virus outbreak is quashing fuel demand and amplifying the effect of the Saudi supply surge.

"Many US shale producers will face intense pressure to rein in production growth, now that Opec/Russia efforts to shore up prices has ended," said Peter Kiernan, lead analyst at the Economist Intelligence Unit.

That pressure will in turn lead to lower capital expenditure across the oil sector, Morgan Stanley analysts said in a note. "Credit markets in the US as well as for oil producers (in emerging markets) will likely react negatively, leading to a further tightening of financial conditions," they added. REUTERS

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