Saudi Arabia’s decision to launch an oil price challenge against Russia sent markets into panic mode, adding further uncertainty to a world already in the throes of the Covid-19 epidemic. We aim to highlight some of the key implications of this predicament.
Saudi Arabia’s decision to launch an oil price challenge against Russia sent markets into panic mode. This adds a third layer of uncertainty on top of the existing two – Covid-19 viral trajectory and future policy responses – in all affected economies. Worse, for investors there are fewer data points and less public information from which to forecast Saudi Arabian (or Russian) oil policy. This note aims to highlight some of the key implications of these issues:
1. The Saudi action does not merely imply ramping up of production, with an estimated spare capacity of just under two million barrels per day (mbd). Saudi Aramco also announced total supply targets, which include emptying some of its global inventories. Other Gulf countries are expected to use their spare capacity as well, so together with Russia’s marginal increase, the world could be faced with over 3mbd of extra supply starting April. This should put continued downward pressure on oil prices, particularly as many key economies will be experiencing peak Covid-19 demand damage at the same time.