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The bloodbath in the oil market is expected to long drawn with Russia now likely to enter the fray with deep discounting of its crude and increased production to capture a larger share of the global market.
Sources said that Russian oil major Rosneft is likely to increase production of oil from its wells from next month to prevent any further erosion in its market share and counter the stepped up production expected from Saudi Aramco.
After the fall of OPEC talks with Russia over production cuts last Friday in Vienna, Saudi Arabia has indicated that it would increase production and offer discounts on crude. Saudi production may be raised by upto 1.5 million barrels of oil per day closer to the kingdom's output capacity of 12 mbpd. It is currently pumping around 9.5 to 9.7 mbpd of oil.
Igor Sechin, the powerful boss of Rosneft and a long-time ally of President Vladimir Putin, has been strongly opposing cuts rather pushing up production to keep their market share intact. Sources said that it is one of the main reasons why the Vienna talks failed.
Now indications are rife that with Saudi Arabia declaring a war on oil prices, Rosneft will match Aramco's strategy at every step to prevent any slide in its market share. The quantum of production increase by Rosneft is still being worked out but it is likely to mirror steps taken by the Saudis.
"We expect to see Saudi Arabia, the UAE and other large producers in OPEC increase production over the rest of 2020 as they return to a market-share strategy rather than price targeting. Inventories will consequentially surge, and as OPEC+ pursues this market share fight, market balances to stay stuck in surplus for at least the first three quarters of 2020 and we can see the lowest oil prices of the last 20 years, implying that the price could tumble to a nadir of $20 a barrel also," brokerage firm Motilal Oswal Investment Services has said in its report reacting to latest global development.
Late last week, talks between oil cartel Organisation of Petroleum Exporting Countries (OEPC) and Russia collapsed as the two sides failed to agree on an output cut deal. This pushed Saudi Arabia, the world's largest oil producer, to cut its crude prices and announce increase production leading to a mayhem in an already over supplied oil market.
The fall of talks between OPEC and Russia for crude production cuts on Friday was reminiscent of the Cold War days when the mistrust between Soviet Union and the US keep the world on the brink, analysts tracking the developments said.
Reports suggest that at the Vienna meeting between oil producers on Friday, Russia's Energy Minister Alexander Novak told his Saudi Arabian counterpart Prince Abdulaziz bin Salman that Russia was unwilling to cut oil production further. The Kremlin had decided that keeping oil prices steady in market ravaged by further shrinking of demand on corona virus spread, would be a gift to the US shale industry.
The Russian thinking, as per reports, was that the frackers in US had added millions of barrels of oil to the global market while their own companies compressed production, and it was time to squeeze the Americans now.
For last few years, the US had become a major player in the oil export market and its share in global trade has been rising though overall it still remains a small player. But for US to remain a serious oil player in the export market, prices of global oil has to be above a threshold of day around $50 barrel. Analysts said that Russian thinking on US shale is not completely misplaced but this was not the tune trigger an oil price war and instigate Saudi Arabia that has also suffered heavily due to low oil prices.
After the OPEC-Russia talks failed, crude went on plunge losing over 30 per cent in just two days. Crude is trading down 22 per cent to $32 a barrel. Brent crude, the global benchmark, has also plunged 22 per cent to $35 a barrel. Both oil contracts are on track for their worst day since 1991 Gulf War.
US oil prices crashed as much as 27 per cent to a four-year low of $30 a barrel.
The fear in the market now is that oil prices may crash further with Saudi Arabia taking an aggressive stance and being expected to flood the market with crude in a bid to recapture market share. Analysts have said that Saudi Arabia had slashed its April official selling prices by $6 to $8 a barrel in a bid to retake market share and heap pressure on Russia.
With strong positions taken by the Saudis and the Russians, analysts said it would be interesting to see how long and how deep the bloodbath in oil market continued.