Saudi Arabia Oil Strategy Faces a Critical Test in April - Bloomberg:
The impact of Saudi Arabia’s decision to increase oil production amidst the demand-killing coronavirus pandemic may not be over yet. Three weeks ago, in reaction to Russia’s decision to pull out of the OPEC+ production cut deal, Saudi Arabia promised to increase its oil production to an all-time high of 12 million barrels per day in April. It also committed to putting an additional 300,000 barrels per day from inventory on the market. This oil was offered to customers at heavily discounted prices. Global oil prices plummeted almost immediately into the $30 per barrel range; since then, they’ve fallen even lower.
This was a huge gamble by Saudi Arabia. From a market perspective, the point was to increase demand for Saudi oil by offering it to customers at cut-rate prices. From a business perspective, Saudi Arabia made this decision before it realized how low prices could go, so high volumes were expected to counteract lost revenue per barrel from the discount. From a political perspective, the point was to show Saudi Arabia’s control over oil markets. With April now upon us, Saudi Arabia is in danger of failing spectacularly on all three accounts. If Saudi Arabia loses on its bet, the global price of oil will lose, too.
The impact of Saudi Arabia’s decision to increase oil production amidst the demand-killing coronavirus pandemic may not be over yet. Three weeks ago, in reaction to Russia’s decision to pull out of the OPEC+ production cut deal, Saudi Arabia promised to increase its oil production to an all-time high of 12 million barrels per day in April. It also committed to putting an additional 300,000 barrels per day from inventory on the market. This oil was offered to customers at heavily discounted prices. Global oil prices plummeted almost immediately into the $30 per barrel range; since then, they’ve fallen even lower.
This was a huge gamble by Saudi Arabia. From a market perspective, the point was to increase demand for Saudi oil by offering it to customers at cut-rate prices. From a business perspective, Saudi Arabia made this decision before it realized how low prices could go, so high volumes were expected to counteract lost revenue per barrel from the discount. From a political perspective, the point was to show Saudi Arabia’s control over oil markets. With April now upon us, Saudi Arabia is in danger of failing spectacularly on all three accounts. If Saudi Arabia loses on its bet, the global price of oil will lose, too.
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