Oil Price War Is Really On As Saudi Arabia Ramps Production by 1m barrels daily

As if the situation weren’t bad enough, Saudi Arabia is ramping production to 13million barrels a day, from current target of 12 million barrels a day, in a classic case of fighting fire by fanning the flames.

State-owned oil giant, Saudi Aramco said Wednesday that it had been asked by the Saudi energy ministry to raise its production capacity to 13 million barrels per day (bpd), up from 12 million bpd at present.

Oil prices tanked on Monday reaching about $30 per barrel, a level not seen since 1991 when American forces launched airstrikes on Iraqi troops following their invasion of Kuwait.

The oil-rich kingdom has been pumping around 9.7 million bpd in recent months, but it has plenty of spare capacity to pump more crude, with hundreds of millions of barrels also in storage.

With oil production cost of $3-$4 dollars per barrel the Kingdom is looking to wage the war irrespective of the fact that it needs oil at $80 to continue to sustain critical subsidies that will help it balance its budget. But Saudi Arabia seems committed to making Russia and US shale producers bleed, even if it would cost it a few pints in the process.

“This bold move to attempt to order production to 13 (million) barrels confirms that Saudi is trying to apply maximum pressure on both Russia and the U.S.,” Cailin Birch, a global economist at the Economist Intelligence Unit (EIU), told CNBC on Wednesday.

“By sending signals that they will flood the market as soon as possible, they may be hoping to either force Russia back to the negotiating table or to prompt a wave of bankruptcies and investment cuts in the U.S. that would have a noticeable impact on shale production,” Birch said.

International benchmark Brent crude traded at $36.05 Wednesday morning, down over 3.2%, while U.S. West Texas Intermediate (WTI) stood at $33.30 around 3% lower.

Saudi Aramco’s announcement on Wednesday comes less than 24 hours after the oil giant announced plans to ramp up production to 12.3 million bpd from April.

While US shale producers have been responding by gutting their spending and drilling plans, analysts say they could be badly hit even though many have hedged prices.

As for Russia, years of US sanctions has taught it how to live with less. Vladimir Putin’s budget balances with crude prices around $40 but Saudi Arabia needs more than $80. Besides with $560 billion in foreign currency reserves, Russia can cover the gap for quite some time, hoping that Riyadh, or a bunch of leveraged U.S. shale producers, would blink first.

Countries like Nigeria, Angola, Iraq, Iran, Libya and Venezuela marked by internal crises will feel the most impact of the on-going price war as their budgets are highly dependent on higher crude revenues.

Nigeria also spends a higher cost in crude production which analysts ascribe to many factors including political risks, insecurity, and vandalism of oil assets.

“Corruption, inefficiency, bureaucracy and over-regulation also play key roles in increasing Nigeria’s cost of production,” said Desmond Ogba, energy lawyer at Lagos-based Templars law firm.

 

ISAAC ANYAOGU