Oil Price Fundamental Weekly Forecast – Saudi Arabia’s Aggressive Moves Signal Start of Price War

U.S. West Texas Intermediate and international benchmark Brent crude oil futures plunged on the opening Monday, in a move that could set the tone for the week. The early 30% loss represents the market’s biggest daily decline since 1991.

The catalyst behind the selling is Saudi Arabia’s slashing of its official selling price (OSP) and its announcement of plans to raise crude production significantly, signaling the start of a price war. Those moves were fueled by Russia decision on Friday to pass on OPEC’s proposed steep production cuts to stabilize prices hit by economic fallout from the coronavirus.

At 04:26 GMT, May WTI crude oil is trading $28.08, down $13.43 or -32.43% and May Brent crude oil is at $31.40, down $13.87 or -30.64%.

Saudi Arabia Retaliates Against Russia

Saudi Arabia said it plans to boost crude output above 10 million barrels per day (bpd) in April after the current deal to curb production between OPEC and Russia – known as OPEC+ – expires at the end of March, two sources told Reuters on Sunday. The kingdom currently pumps 9.7 million barrels per day, but has the capacity to ramp up to 12.5 million barrels per day.

The Saudi’s also cut its OSP for April for all crude grades to all destinations by anywhere from $6 to $8 a barrel, sending oil into a tailspin.

World Reaction

This has turned into a scorched Earth approach by Saudi Arabia, in particular, to deal with the problem of chronic overproduction,” Again Capital’s John Kilduff said. “The Saudis are the lowest cost producer by far. There is a reckoning ahead for all other producers, especially those companies operating in the U.S. shale patch.”

Goldman Sachs analyst Damien Courvalin said in a note to clients Sunday. “We believe the OPEC and Russia oil price war unequivocally started this weekend when Saudi Arabia aggressively cut the relative price at which it sells its crude by the most in at least 20 years. The prognosis for the oil market is even more dire than in November 2014, when such a price war last started, as it comes to a head with the significant collapse in oil demand due to the coronavirus.”

The firm also cut its second and third quarter Brent forecast to $30 per barrel, and said that prices could dip into the $20s.

Weekly Forecast

There is nothing else to say except this is bad. Although the Saudis and the Russians could reach an eventual deal to stabilize prices. Some experts are only putting that at 60%. Some are even saying that the plunge in prices has become an even bigger problem for the markets than the coronavirus.

Our works suggests that crude oil is not likely to fall below $20, but if it does because of selling momentum, it will be bought up quickly. It may have trouble regaining $30 a barrel, which likely means we could see several days of it straddling $25 per barrel.

The major issue is the geopolitical implications of the move. On the positive side, buyers will be getting cheap oil. Gasoline prices in most of the U.S. could plunge below $2.00 a gallon. On the negative side, countries with weak economies like Iran and Iraq could fall into recession. Finally, low prices could force U.S. firms to shut down production, threatening their share of the marketplace.