No Middle Ground In Middle East Price War

By Aditya Saraswat, Senior Upstream Analyst at Rystad Energy

A month after powerhouses Saudi Arabia and Russia failed to reach an agreement over production cuts and the oil price has dwindled to less than $30 per barrel (bbl), with no signs of stopping. Unleashed, the middle eastern giants are rearing to gain market share by heavily discounting crude grades and putting their crude on wholesale. Amidst it all, the second quarter already looks terribly oversupplied as an oil market struck by the coronavirus shows little appetite.

OPEC+ member countries are now aiming to utilize their maximum capacities to capture the majority of the oil market. Meanwhile, Saudi Arabia is preparing to deploy the equivalent of an atomic bomb upon the oil market in April, with plans to supply 12.3 million barrels per day (bpd) of crude to the market next month. For this ambitious target, the kingdom will have to rely on some draws from commercial storage, as Rystad Energy estimates their upstream crude production capacity – without any additional drilling – is limited to around 11.5 million bpd in the short term. In line with this, Saudi Arabia has hired 25 to 30 extra oil tankers by state tanker company Bahri and notified field supervisors to prepare fields for maximum output.

Saudi Arabia’s all-time high crude production was previously achieved in November 2018 when it produced 11.1 million bpd. For now, we expect crude production to rise to 10.8 million bpd from 9.8 million bpd in Feb 20, and to increase further to 11.2 million bpd in May 20. However, we believe Saudi Arabia is able to meet, and possibly exceed, the 11.0 million bpd production target as soon as April. At 10.8 million bpd of upstream production, the stock draws at Saudi-controlled storage facilities would have to amount to 1.5 million bpd in April (45 million barrels).

Core-OPEC members UAE and Kuwait, each with around 300,000 bpd of spare capacity, will contribute to the crude tsunami in April. Both countries’ NOCs aim to boost sales in April, with ADNOC announcing its intent to supply 4 million bpd to the market in April. We expect UAE production will increase by around 200,000 bpd to 3.20 million bpd in April from February levels of 3.04 million bpd, mostly driven by its flagship-grade Murban, produced onshore. We acknowledge that the UAE could manage to increase production even higher if it utilizes its entire spare capacity, but this would require drawing significant amounts of crude from storage if the country aims to supply 4 million bpd to the market. On the other hand, Rystad Energy forecasts crude production from Kuwait could reach 2.80 million bpd in April with less upside risk than for UAE, Russia and Saudi Arabia.

The last major country with ample available spare capacity to potentially bring to the market in April is Iraq.

In the ongoing price war, Rystad Energy expects Iraq will begin to bring back production from state-operated fields, where 480,000 bpd was collectively cut under the recent OPEC+ cuts. Based on our analysis, Iraq will ramp-up production by 250,000 bpd to nearly 4.90 million bpd in April. If Iraq is able to find buyers for this additional crude, the total 480,000 bpd could be back online by June 20.

The devil is, of course, still in the demand details. Global oil demand faces increasingly negative prospects as the macro picture weakens on quarantine measures across the world, most recently in France, Spain, and other European countries who have announced nearly total economic lockdown in March. As an increasing number of countries shutter economies to fight the coronavirus outbreak, at least 2 million bpd in April will contribute to the unprecedented supply glut, which Rystad Energy expects will grow in the short term.

Indeed, the oil industry may experience one of the greatest shocks in history as coronavirus containment measures will add to the headache of producers fighting for market share. The next pressing question for the oil market is: Can the market actually absorb all the expected crude supply during 2Q 2020? Or, will the oil spot price have to collapse entirely, forcing production shut-ins due to real physical storage constraints? And which supply is most at risk from ever decreasing oil prices? In Rystad Energy’s oil price and production outlook base case, we assume that the ramp-up in OPEC production will only last until June of this year, at which time we expect that a new production cut agreement will be made.

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