(The opinions expressed here are those of the author, a columnist for Reuters.)
By Clyde Russell
LAUNCESTON, Australia, March 12 (Reuters) - If you can’t beat the Saudis, join them.
That logic appears to be taking hold among allies and rivals of the world’s largest exporter of crude oil, but it may only work if you are a low-cost producer close to your major markets.
The latest example is the United Arab Emirates announcing that it will step up output to more than 4 million barrels per day (bpd) in April, which would be a leap of more than 1 million bpd from its February output of 2.99 million bpd.
State-owned Abu Dhabi National Oil Company (ADNOC) also said it would aim to boost its production capacity to 5 million bpd by the end of this year, a target it had previously only planned to reach by 2030.
The move by ADNOC to boost output came days after Saudi Arabia said it would lift production to a record 12.3 million bpd in April, up from 9.7 million bpd in February. The kingdom also slashed its official selling prices (OSPs) for April-loading cargoes.
ADNOC also appears to have been stung into changing the way it prices its oil, moving to a system similar to the Saudis, setting its price for future deliveries against a benchmark, and dumping its old system of retrospective pricing.
It may seem a somewhat arcane change, but in the clubby world of oil trading in the Middle East and Asia, it’s a major concession by ADNOC, one they probably didn’t make willingly.
This underscores just how rapidly the market is shifting in light of the Saudi actions, with traders reporting buyers demanding significant discounts for spot cargoes, and increasing noises about how longer-term supply agreements may be re-negotiated to take into account that refiners now hold the whip hand in the crude market.
The rapid escalation of the oil supply war came after the collapse last week of the agreement between the Organization of the Petroleum Exporting Countries (OPEC) and allied producers, including Russia, to limit production to support prices.
The Saudi decision to flood the market with 2.6 million bpd more crude oil in April than in February sparked a collapse in oil prices, with global benchmark Brent plunging 24% on Monday, it’s second-biggest percentage decline on record.
The slump in crude prices comes amid the ongoing hit to demand from the coronavirus, which has spread beyond China to every continent besides Antarctica, and has now been declared a pandemic by the World Health Organisation.
While lower oil prices will ease some of the economic pain being caused by the coronavirus, it’s not exactly certain where all the oil being unleashed on the global markets will go.
Saudi Arabia and the UAE will add 3.6 million bpd between them in April, and Russia is likely to add as much as 500,000 bpd, taking additional barrels from just those three producers to somewhere around 4% of current global daily demand.
It’s likely that other Middle Eastern producers such as Kuwait, Qatar, Iraq and even sanctions-hit Iran will all follow Saudi Arabia’s lead and offer increased volumes.
The obvious aim of the increase in oil production is to force U.S. shale oil producers to curb growth in or even cut output as their profitability collapses.
The United States recently became the world’s biggest oil producer ahead of Russia and Saudi Arabia, but this dynamic may be short-lived.
Even if U.S. output does drop, the supply war will also hit other producers of higher-cost oil, such as Canadian oil sands and Brazilian deepwater crudes.
Much of the extra oil from the Middle East will be medium and heavy grades that don’t directly compete with light U.S. shale oil, but do compete with Canadian and Brazilian output.
Given that China, and to a lesser extent India, are among countries that can store additional crude, it’s likely that much of the crude surplus in April will go into some form of storage.
The rates for tankers to both ship crude and store it offshore have more than doubled this week, responding to news that Saudi Arabia’s national shipping firm has tentatively chartered as many as 14 extra supertankers, in addition to the 42 vessels in its own fleet.
Surging tanker rates further advantage the low-cost producers in the Middle East, especially when it comes to serving Asia, the largest crude-importing region.
The market is currently focused on how low the price might go amid the surge in supply and the hit to demand from the coronavirus. By April and May the focus may be on where all the extra crude is going to be stored. (Editing by Tom Hogue)