Prices have plummeted more than 60% since the beginning of year after OPEC+ failed to reach an agreement, leading Saudi Arabia and Russia to enter a price war amid the global coronavirus crisis.
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“This was always going to be an inevitability of the production-cut strategy that OPEC+ had been adopting,” said Edward Bell, senior director of market economics at Dubai-based bank Emirates NBD. “Saudi Arabia was not going to restrain production infinitely and allow for other producers in the rest of the world to take away its market share.”
Brent crude fell 5.01% to $25.03 on Wednesday evening in Asia, while U.S. crude futures were down 1.03% at $20.27.
Higher production levels can help Saudi Arabia maintain its oil revenues while prices are low, Bell told CNBC’s “Capital Connection.”
“That suggests to us that the oil price war strategy remains in place for quite a long time, until the end of this year, if there is no real diplomatic breakthrough,” he said.
If Russia, a non-OPEC member, or countries in the cartel decide to call for some kind of production restraint, the oil market could go back to behaving the way it has for the past few years, Bell said.
“You could see prices rallying on the back of … 5, 10 million bpd being cut, and those are the kind of scales of cuts that could be required, given the severity of the demand destruction that we’re seeing,” he said.
That, in turn, would also allow the U.S. shale patch to increase production again.
However, Riyadh doesn’t seem prepared to back down from its price-war strategy, he said. “We don’t really see any change in the oil market diplomacy.”
If the kingdom wants to carve out its place as the global dominant oil supplier, it’s going to mean “a lot of pain” for marginal producers, he added. “It’s going to have to try and squeeze them out of the oil market as permanently as it can.”
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