OPINION: The ongoing oil market rout is set to get worse amid overflowing inventories and fast-dissipating demand triggered by the relentless march of Covid-19 across the globe.
Yet Saudi Arabia and its Persian Gulf allies are speeding up a price war that is bound to prolong the misery for other less wealthy producers.
It is all about market share these days and Saudi Arabia is betting that it and allies Abu Dhabi and Kuwait will emerge victorious thanks to their low-cost reserves and ability to endure prolonged hardship.
They are the only producers in the world sitting on massive excess capacity with combined firepower exceeding 3 million barrels per day.
In the quest to snatch clients from rivals, Saudi Aramco is offering heavily discounted volumes that are expected to rise exponentially in the coming weeks even as global demand keeps collapsing, leaving the world literally awash with oil.
Aramco, which has made steep cuts to its selling price for April-loading crude, plans to rein in local refining capacity to boost sales abroad.
Energy experts are warning of doom and gloom as the rapid pace of the virus wreaks havoc on leading economies.
Energy-hungry India became the latest nation to order a total lockdown of its 1.3 billion people as the World Health Organization warned the US could become the new hotbed of the outbreak.
Business activity in the US and Europe has plunged to record lows as the pandemic fuels a growing global economic crisis, according to analysis company IHS Markit.
Yet, despite the devastating impact of the virus on energy consumption, Aramco is gearing up to ship more than 10 million bpd of oil in the weeks ahead following the collapse of a supply-cut pact between Opec and Russia in March. Abu Dhabi and Kuwait are also adding volumes in the free-for-all race for market share.
To put it in perspective, Saudi crude exports averaged around 7.3 million bpd in February.
The expected flood of new Persian Gulf supplies comes as strategic inventories are filling up quickly as importers take advantage of low prices.
Barclays has just joined other banks in slashing its oil price forecasts for 2020, citing considerable downward pressure from the evolving price war waged primarily by Saudi Arabia and Russia.
The UK bank forecast global available onshore storage capacity at about 1.5 billion barrels, with an estimated oversupply of over 5 million bpd for this year and of 10 million bpd on average for the second quarter.
The US has been buying cheap oil to fill the Strategic Petroleum Reserve (SPR) and help its struggling shale industry.
However, the available SPR storage capacity is fewer than 80 million barrels.
Elsewhere, China — the world’s largest importer of crude — is also running out of storage capacity, compounding the oil glut and price weakness.
Major Russian producers, already feeling the pinch, are reluctant to use precious cash to ramp up output to fuel the current price war after 1 April, when the supply pact between Russia and Opec expires.
Aramco and its Persian Gulf allies are under no such financial pressure since their output policies are dictated by deep-pocketed governments determined to endure the unpleasant combination of collapsing demand and prices to weed out rivals with untenable production costs.
(This is an Upstream opinion article.)