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Oil falls as Saudi, UAE plan for higher output capacity

CommoditiesMar 11, 2020 01:11PM ET
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© Reuters. FILE PHOTO: Pump jacks operate in front of a drilling rig in an oil field in Midland

By David Gaffen

NEW YORK (Reuters) - Oil prices fell on Wednesday after Saudi Arabia and the United Arab Emirates announced plans to boost production capacity and OPEC and the U.S. Energy Information Administration (EIA) slashed oil demand forecasts because of the coronavirus outbreak.

Brent crude was down $1.01, or 2.7%, at $36.21 per barrel by 12:12 ET (1712 GMT), while U.S. West Texas Intermediate (WTI) crude was off $1.05 or 3% at $33.31‮‮.‬‬

With the collapse of coordinated output cuts by Saudi Arabia, Russia and others, the Saudi energy ministry has directed producer Saudi Aramco (SE:2222) to raise its output capacity to 13 million from 12 million barrels per day (bpd).

UAE national oil company ADNOC also said it would raise crude supply to more than 4 million bpd in April and accelerate plans to boost its output capacity to 5 million bpd, a target it previously planned to achieve by 2030.

"Saudi's shock and awe strategy suggests to us that to bring Russia back to the negotiating table, it is serious in causing severe price and revenue pain for all oil producers," UBS analysts said in a note.

"Higher oil inventories will likely weigh on prices over the coming months."

Trading in long-dated Brent futures contracts points to expectations that supply will continue to rise. The current Brent front month contract recently traded at more than $5 below the six-month contract, the biggest discount since January 2016.

(Graphic: Oil price forecasts dim after price war begins - https://fingfx.thomsonreuters.com/gfx/editorcharts/GLOBAL-OIL/0H001R8FWC99/eikon.png)

Russian Energy Minister Alexander Novak said Saudi Arabia's plans to increase production capacity were "probably not the best option", adding Moscow had several phone calls with OPEC and non-OPEC members, but that no partners had agreed to its proposal.

Meanwhile, the Organization of the Petroleum Exporting Countries (OPEC) said in a monthly report that it expected global demand to rise by just 60,000 bpd in 2020, a reduction of 920,000 bpd from its previous forecast.

The U.S. Energy Information Administration (EIA) also said global oil demand is expected to dive by 910,000 bpd in the first quarter due to coronavirus outbreak.

Oil prices had climbed $2 earlier in the session on hopes that spending cuts by North American producers to cope with multi-year low crude prices would lead to a drop in output. Numerous U.S. companies have already cut back spending, including Occidental Petroleum Corp (NYSE:OXY), Marathon Oil Corp (NYSE:MRO) and Diamondback Energy Inc.

"Any reduction in spending and drilling will take time to show up in actual production figures and is unlikely to mitigate the bearish impact of a massive Saudi output increase, in case the latter does happen," oil brokerage PVM's Tamas Varga said.

Weekly data on U.S. inventories showed little effect from the coronavirus outbreak. Crude stocks rose by 7.7 million barrels, but inventories of gasoline and diesel fell sharply, as refining runs remain at seasonally low levels.

"Demand for products is robust - which surprises me. It certainly is coming as a surprise to market watchers here as fear of the impacts to demand brought on by the coronavirus have not shown up," said Tony Headrick, energy market analyst at CHS Hedging.

Policymakers and central banks have been taking measures to bolster their economies against disruption caused by the coronavirus outbreak, the latest being the Bank of England which unexpectedly cut interest rates by half a percentage point on Wednesday.

"Oil's supply-demand dynamics still point to a bias for weakness, as Saudi Arabia and Russia engage in a price war that threatens to push global markets into oversupplied conditions, at a time when global demand is being eroded by the coronavirus outbreak," Han Tan, market analyst at FXTM.

(Graphic: Oil price dive turns up the heat on OPEC finances - https://fingfx.thomsonreuters.com/gfx/editorcharts/OIL-OPEC/0H001R8FBC7L/eikon.png)

A worker at Equinor's Martin Linge offshore oil and gas development has been diagnosed with the coronavirus and is being held in isolation, the Norwegian energy firm said. It said activity on the field will be reduced on Wednesday.

However, China's independent oil refiners are cranking up production as local governments begin to relax strict measures to contain the coronavirus and fuel demand begins to recover.

Oil falls as Saudi, UAE plan for higher output capacity
 

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Comments (12)
Ng Long
Ng Long Mar 11, 2020 8:45PM ET
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The Saudis are so worried they may loose market share that they will do anything. They should just get out of business because one day this malarkey isn't going to work anymore!!!
Space Lord
Space Lord Mar 11, 2020 9:54AM ET
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The good news to go long. 40$ Brent today
rob finch
rob finch Mar 11, 2020 9:34AM ET
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We started drilling to break the oil cartels and return free market competition. Didn't we?
rob finch
rob finch Mar 11, 2020 9:21AM ET
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We need more collusion and price gouging?
Andrew Paeth
Andrew Paeth Mar 11, 2020 5:13AM ET
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China is Saudi's #1 customer. Russia and the good ol USA are trying to weaken China; the Arabs are punk slapping the US/Russia in retaliation for neutering their best customer. Putin doesnt care as long as US shale gets buried in the fallout. The Russians will starve their own people out to make more money down the road. They can live on potatoes...borscht and vodka. They did it for centuries...
Jo Joe
Jo Joe Mar 11, 2020 5:13AM ET
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Politician Putin have such a long term plan? how long he have to wait for? Not make sense.
Stanislav Ivanovskiy
Stanislav Ivanovskiy Mar 11, 2020 5:13AM ET
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Sad but true...
KC Wong
KC Wong Mar 11, 2020 5:13AM ET
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Replace your story by switching Saudi role with Russia, then it make sense. Below are the top 15 countries that supplied 90.6% of the crude oil imported into China during 2018. Russia: US$37.9 billion (15.8% of China’s total imported crude) Saudi Arabia: $29.7 billion (12.4%) Angola: $24.9 billion (10.4%) Iraq: $22.4 billion (9.4%) Oman: $17.3 billion (7.2%) Brazil: $16.2 billion (6.8%) Iran: $15 billion (6.3%) Kuwait: $11.9 billion (5%) Venezuela: $7 billion (2.9%) United States: $6.8 billion (2.8%) United Arab Emirates: $6.7 billion (2.8%) Congo: $6.4 billion (2.7%) Colombia: $5 billion (2.1%) Malaysia: $4.8 billion (2%) Libya: $4.7 billion (2%)
Azam Khan
Azam Khan Mar 11, 2020 2:53AM ET
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Market will go to wrong direction if Mr President is not going to speak about measures he is going to take to ease economic downturn.
Ramm Batts
Ramm Batts Mar 11, 2020 1:11AM ET
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So much media nonsense it us just a pneuomina virus what horse ****it is over Mankind has survived
Jeff Gordon
Jeff Gordon Mar 11, 2020 1:11AM ET
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no one can tell irrational people like you how wrong you are. you just keep telling yourself everything is fine.
cran Vivid
cran Vivid Mar 11, 2020 12:29AM ET
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I feel there might be a positive outcome of the meeting...otherwise that would be a joke to meet just after few days to get the same answer
Jason Zou
Jason Zou Mar 10, 2020 11:00PM ET
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This ugly fight for market shares is way overdue and supressed way too much, especially in light of the chaos in todays world order. Some major disturbance seems inevitable and being in play right now. Buckle up.
Naresh garg bobby
Naresh garg bobby Mar 10, 2020 10:28PM ET
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US production cost is much higher than Saudi and Iran ...US around USD32Saudi around USD18Iran around USD 17.5US will have to close production if this trend continues.
Naresh garg bobby
Naresh garg bobby Mar 10, 2020 10:26PM ET
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It's a fight for market share...
Abe Lincoln
Abe Lincoln Mar 10, 2020 10:10PM ET
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Total Evil at work and utter Nonsense!
Christopher Frey
Christopher Frey Mar 10, 2020 10:10PM ET
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whys that?
Abe Lincoln
Abe Lincoln Mar 10, 2020 10:10PM ET
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Christopher Frey Political I think Putin wants Trump out just like the Demo *******s. He respects Trump too much to mess with him. But a Bernie or Air Head Biden would be Easyyyyyyyyyyyyy.
Michael Murphy
Michael Murphy Mar 10, 2020 10:10PM ET
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Abe Lincoln I thought this started between Saudis fighting with Russians....
Christopher Frey
Christopher Frey Mar 10, 2020 10:10PM ET
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I believe there is a lot more going on here. Putin is smart and realises OPEC and OPEC + production cuts have been boosting up oil prices for years, and the US doesn't take any of that burden. So while there cutting back, were expanding shale. I believe he is just sick and tired of propping up US oil companies.
 
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