The oil price war could persist until year-end, analyst says

The oil price war could last until the end of the year, an analyst said this week.

Prices have plummeted more than 60% since the beginning of year after OPEC+ failed to reach a new agreement, leading Saudi Arabia and Russia to enter a price war amid the global coronavirus crisis.

Riyadh said it will boost output to 12.3 million barrels per day in April, while Moscow said it can increase production by 500,000 bpd in the long term.

“This was always going to be an inevitability of the production cut strategy that OPEC+ had been adopting,” said Edward Bell, senior director of market economics at Dubai-based bank Emirates NBD. “Saudi Arabia was not going to restrain production infinitely and allow for other producers in the rest of the world to take away its market share.”

Brent crude fell 5.01% to $25.03 on Wednesday evening in Asia, while U.S. crude futures were down 1.03% at $20.27.

Higher production levels can help Saudi Arabia to maintain its oil revenues while prices are low, Bell told CNBC’s “Capital Connection” on Wednesday.

“That suggests to us that the oil price war strategy remains in place for quite a long time, until the end of this year, if there is no real diplomatic breakthrough,” he said.

If Russia or other countries in OPEC decide to call for some kind of production restraint, Bell said the oil market could go back to behaving the way it has for the past few years.

“You could see prices rallying on the back of … 5, 10 million bpd being cut, and those are the kind of scales of cuts that could be required, given the severity of the demand destruction that we’re seeing,” he said.

That, in turn, would also allow the U.S. shale patch to increase production again. 

However, Riyadh doesn’t seem prepared to back down from its price war strategy at this point, he said. “We don’t really see any change in the oil market diplomacy.”

If the kingdom wants to carve out its place as the global dominant oil supplier, it’s going to mean “a lot of pain” for marginal producers, he added. “It’s going to have to try and squeeze them out of the oil market as permanently as it can.”