Russia and Saudi Arabia are boosting oil output at a time of falling demand.
Saudi Arabia and Russia are locked in a race to the bottom as a bitter price war rages between the two major oil producers, with some analysts predicting prices may soon fall to $15 a barrel. But the recent drop in prices is also driven by a collapse in demand, as the global economy reels from the ongoing impact of the COVID-19. The outbreak convulsed oil-consuming industries amid fears the crisis could trigger a wave of corporate bankruptcies. Still, Saudi Arabia and Russia’s breakneck production puts US shale producers firmly in their crosshairs.
Despite prices falling 24% in a single day in March, OPEC kingpin Saudi Arabia shows few signs of backing down on its determination to ramp up production. Saudi Aramco, the kingdom’s state-backed refiner, says it plans to continue with a hike in production from April into May, increasing output to a record 12.3 million barrels a day. Neighboring OPEC producer, the United Arab Emirates, also committed to raising output, with Kuwait likely to follow.
Saudi Arabia needs oil prices around $85 a barrel to balance the government’s budget deficit, according to Capital Economics, while Russia needs prices around $40 a barrel, developing-markets specialist Tellimer estimates.
Saudi Arabia’s reformist crown prince, Mohammed bin Salman, is under pressure to overhaul the kingdom’s dependence on oil, but has been dealt a number of setbacks. The price of Aramco’s stock recently fell below its offer price. Millions of Saudis were encouraged to borrow to buy shares at the time of Aramco’s December’s public offering. Last month, 13 Republican senators wrote to MbS, as the Saudi leader is widely known, calling for stability in oil markets.
Meanwhile sub-$20 prices are a near certainty, according to Roger Diwan, vice president at IHS Markit. “This is a question for today, this week or next week? The question is when, not if,” he said in a Twitter post.