Commenting on Saudi Arabia's Crude oil fire-sale following last week's OPEC+ meeting in Vienna, Bjarne Schieldrop, chief commodities analyst at SEB, the leading Nordic corporate bank, says Saudi Arabia has created a race to the bottom to sell Crude into the market:

"Saudi Arabia declared an oil price war this weekend, as OPEC+ departed Vienna on Friday without a deal. It's still a slight hope that Saudi Arabia is playing this card in an effort to push OPEC+ members back to the negotiation table before the current production cuts expire at the end of March, however Russia is unlikely to bend to such power tactics.

"Saudi Arabia basically offered its oil on a fire-sale as it dropped its Official Selling Prices (OSPs) to all regions by $6-8/bl - the sharpest decline in Saudi Arabia's OSPs in decades. Saudi Arabia is undercutting everyone else by a mile, and as such it has created a race to the bottom where everyone must undercut each other in order to be able to sell their crude oil into the market.

"In a market where demand is collapsing due to the unfolding coronavirus outbreak, the only way to push more oil into the market is to push it into storage. To achieve this, producers must offer their physical oil at a large discount to longer dated prices so that the difference can pay for the storage of the oil surplus, i.e. spot crude oil prices needs to be very low versus longer dated prices.

"Several OPEC ministers have stated that further discussions will take place in the coming days and weeks in the run-up to the end of the current production-cut agreement in March, so there could still be a slight hope for a deal. Saudi Arabia's announcement of an oil fire-sale might be a negotiation tactic. If this ends with an outright price war with a large production increase against collapsing demand (due to the coronavirus), then oil will fall even more than we have seen this morning. Brent crude moving down into the lower-$20/bl range seems reasonable to expect as oil inventories build higher in such a scenario. However, there is still a slight hope for a last-minute deal over the coming 20 days to the end of March 2020, and this prevents the oil price from diving further down right now.

"If there is a last-minute deal before the current Q1 2020 cuts run out, then the best one can hope for is that OPEC+ rolls their cuts forward to Q2 2020 while OPEC cuts 1m bl/day. This would still lead to a solid oil inventory build and low oil prices, but it would be more controlled than what now seems likely unfolding. It's Russia against US shale, and Saudi Arabia against Russia. If there is no last-minute OPEC+ deal, then there is basically only one outcome: US shale oil production has to decline. In the last shale oil reset in 2014/15/16, US shale production declined by 0.9m bl/day from July 2015 to July 2016.

"In the coming shale oil reset, one can expect US oil production to decline by 1-2m bl/day over a 12mth period. Exactly when this decline kicks in is difficult to predict. The US shale oil business has been cooling down already over the past 12 months and is today only growing marginally. A contraction could kick in faster than it did in 2014/15 when it typically took nine months from price decline to production decline.

"Many analysts are now forecasting zero oil demand growth from 2019 to 2020. That might be true in terms of billion barrels consumed in total. However, if the world puts the coronavirus behind it in H1 2020 and the global economy revives in H2 2020, then the consumption rate of oil in Q4 2020 might still be 1m bl/day higher than it was in Q4 2019. And the rate of production versus rate of consumption typically matters a lot for the oil price. If US shale oil at that point in time is in sharp decline while consumption is rebounding strongly as the world puts the coronavirus behind it, that could lead to a good rebound in the oil price in Q4 2020."