Oil price cuts, to reignite the market share war with Russia?

Forex Distribution

Oil traders in Asia are preparing for one more round of hefty price falls next week, in benchmarks like Brent and Dubai. This comes after Saudi Arabia, otherwise the biggest oil exporter in the world, slashed prices, thus leading to a new market share battle between some of the most important producers.

The history repeats itself

Besides Saudi Arabia and Rusia, many other producers in the Middle East were basically locked in a market share war, during from 2014 to 2016, as they were trying to squeeze out shale production from the United States, through a strategy involving lower prices and offering an increased quantity of supplies to Asia.

Previously, the dispute ended when OPEN, the Organization of the Petroleum Exporting Countries and Russia agreed to cut production. However, things could be looking a bit different this time.

On Friday, the OPEC, led by Suadi Arabia, had a difficult time reaching an agreement with Russia, the world’s second-largest oil producer, in an attempt to deepen production cuts and shore up prices.

As a consequence, global price maker Brent dived more than 9% on Friday, reaching $45.27 per barrel, which is actually its biggest single-day loss, registered in 11 years.

The situation continued throughout the weekend, after Saudi Arabia slashed the official selling price for April for the entire range of crude grades, to all destinations. Even more, they are planning to raise the production to more than 10 million barrels per day in April, for s the first time since May 2019.

Breaking new negative records

The price cuts for the Asian market reached $4-$6 a barrel, which can be considered the biggest price reduction in modern history, not to mention that it surpassed the initial expectations of $2 a barrel but, for the flagship Arab Light grade.

“It looks like an all-out Saudi shock and awe strategy to drive up Saudi volumes and compete with Russian oil in their own backyard in Europe as well as Asia,” revealed senior visiting fellow at Middle East Institute, National University of Singapore, Tilak Doshi.

“This could be even worse than 2nd half 2014 and prices could test $30 or even $20 given the simultaneous demand shock with the coronavirus impact on economic activity,” he added.

Finally, it can be said that Asian buyers are now split, as the arbitrage windows for oil from areas like Africa, Europe or the Americas have opened, following Brent’s premium to Dubai narrowing, while the tanker freight rates just slumping, considering their January highs.