OPEC supply may be returning; Saudi offers prices $8 lower

March 8, 2020
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AEGIS will be working trades for clients at 5 PM when markets open. We have word from many banks and merchant trading desks that personnel will be available to execute hedges this evening.

Already it’s being called a price war. Maybe it’s better described as maneuvering for market share in a time when demand has been crippled by Covid-19, and supply from OPEC+ may start to come back in April.

Saudi Arabia is reported to be lowering its official selling price into Europe by $8 (Brent crude is only near $45 as of Friday), a tactic that appears aimed at taking market share away from Russia. Russia and OPEC failed to reach a production-quota deal in last week’s OPEC meeting. OPEC members and partners will be free to produce at full rates on April 1. According to Bloomberg, the kingdom said it would immediately raise production next month.

There are several concerns, all of which are bearish.

  1. Saudi’s official selling price (OSP) into Europe essentially sets the “offer” in the market $8 lower, and forces competitors to match it. WTI is likely to fall by a similar amount.
  2. Speculators are likely to sell out of long positions, adding to downward price pressure.
  3. The S&D balance does not immediately get worse, but the breakdown in OPEC+ (see last week’s AEGIS Market Summary for details) production-quota policy means more supply could flow into the market in April. And Saudi Arabia has, by our estimates, 1.5 MMBbl/d of production it can bring back quickly.
  4. These kinds of events are infrequent, and it may be folly to look for price wisdom in analogous past events. But, if they are good examples, sub-$30 was not maintained for long, and $30 would be a support level.
  5. However, some types of regression-based historical supply-demand analyses could estimate the price of oil below $20.

This market was already reeling from a drop in demand caused to the Covid-19 outbreak.  Now, the threat of more supply out of OPEC – “price war” or not – is highly likely to send prices sharply lower when trading opens.

AEGIS will be providing updates.

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