Price Wars
I think that Saudi Arabia cutting Official Selling Prices (OSP) by the most on record over the weekend is a clear signal it will aggressively attempt to place its barrels and win market share, even if it leads to long-lasting lower prices. After several other OPEC nations followed Saudi’s direction on pricing, we expect prices averaging $34.30/bbl and $39/bbl through the balance of the year for WTI and Brent, respectively, though forecasting pricing during panics and hysteria may seem futile currently.
Looking to US shale producers
The unprecedented pairing of a price war and pandemic remains open-ended from a duration standpoint. Even if/when demand increases again, the excess crude piling up in storage will be difficult to clear. Price-elastic US production is likely the release valve wherein several shale producers have already announced plans to idle rigs. Today’s depressed pricing may be predicated by how quickly domestic producers begin to reel in production profiles. Given the attacks on Abqaiq in the fall and the height of the US and Iran conflict earlier this year, which spiked prices, oil producers had had ample opportunity to lock in pricing at attractive levels. Those that didn’t will be the most exposed to the price pain.
Leaders and Laggards…for Whenever Prices Rebound
If Saudi or Russian policy does not change, or there is no US shale capitulation, improvement will have to come from a change in demand levels. I believe that once consumption of refined products such as gasoline, distillate, and aviation fuel improves, product balances and storage will then clean up, leading to margin expansion, primarily in Asia but also in the rest of the world.
