Saudi Arabia escalated its oil price war with Russia on Tuesday, with its state-owned company pledging to supply a record 12.3 million barrels a day next month, a massive production hike to flood the market.
The output increase — more than 25% up from last month — puts Aramco supply above its maximum sustainable capacity, indicating that the kingdom is even tapping its strategic inventories to dump as much crude, as quickly as possible, on the market. In February, Saudi Arabia produced about 9.7 million barrels a day.
It’s the latest manoeuvre in what’s set to be a long and bitter price war between Russia and Saudi Arabia. On Monday benchmark oil prices fell more than 20%, the largest one-day drop since the Gulf War in 1991, creating mayhem in global equity and bond markets.
Oil prices, which were recovering after the historic plunge a day earlier, immediately dropped. Brent crude was trading 5.9% higher at $36.38 a barrel at 9:34 a.m. in London.
Moscow responded within minutes in what looked like a war of words, with Alexander Novak, the country’s energy minister, saying Russia had the ability to boost production by 500,000 barrels a day. That would put the country’s output potentially at 11.8 million barrels a day — a record.
Riyadh is using its strategic oil stocks to boost supplies at very short notice, according to people familiar with its strategy. On top of domestic stockpiles, it also stores crude near consumption hubs in Rotterdam, Okinawa and the Egyptian port of Sidi Kerir. Russia doesn’t have a network of strategic oil stocks to match.
“Welcome to the free market,” said Bob McNally, founder of consultant Rapidan Energy Group and a former White House official. “The world is about to learn very swiftly how important a swing producer is for stability, not only for the global oil market but the broader economy and geopolitics.”
For decades, the oil market has been largely regulated. First by Americans, who set production quotas for their oil companies through the Texas Railroad Commission in the first half of the 20th century, and later by the Organisation of Petroleum Exporting Countries, the oil cartel. Through that time, Texas and later OPEC acted as swing producers, upping output at times of scarcity and reducing it at times of lower demand, to keep prices stable.
With oil demand rapidly falling due to the economic impact of the coronavirus epidemic, the Saudi production hike, followed potentially by another one from Russia, is likely to force oil companies to store crude, rather than process it. Traders are already seeking out tankers to store the glut.
The International Energy Agency earlier this week said that global oil demand will contract this year for the first time since the global financial crisis in 2009.
The U.S. and other Western countries are starting to worry about the oil price war between two of the world’s most powerful petroleum nations. On Monday, the U.S. Department of Energy denounced in a rare statement “attempts by state actors to manipulate and shock oil markets”.
Even as both sides ramped up production and the war of words, Novak said the door wasn’t closed to future talks. He said OPEC+ could meet in May or June.