Saudi Aramco (Aramco) sells oil to its long-term customers at an official selling price (OSP) versus a benchmark (e.g. Dubai/Oman prices for Asia, Brent for Europe). Saudi Aramco sets the OSP at the beginning of every month for the month ahead, usually based on specific factors (refinery product yields, local market conditions etc.).
On Saturday, Aramco slashed its April OSP. The cuts are unprecedented
in size (USD 4-6/bbl for Asia, USD 7/bbl for the US, USD 7-8/bbl for Europe). Such aggressive cuts suggest that Aramco will raise its production heavily in April—we think to 10.5-11 million barrels per day (mbpd) from around 9.7mbpd in March. The cuts to Europe also signal Saudi Arabia's intention to bring Russia back to the negotiating table with the aim of delivering a new production cut (Russia was the first to suggest that countries should be able to produce at will from April).
If OPEC and its allies (OPEC+), such as Russia, are no longer willing to balance the oil market, oil prices will need to fall further into the production cost curve, which will trigger supply reductions to offset coronavirus-related demand losses. This means Brent prices will likely fall into the low USD 30s/bbl over the coming days and weeks. We still expect a price recovery over our forecast horizon, but it will be contingent on supply adjustments (the pain of low prices might unite OPEC+ with the group delivering new cuts, and/
or lead to a drop in US crude output).
See original post Crude oil: A new price war erupts 8 March 2020
Main contributors: Giovanni Staunovo, Wayne Gordon
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