Oil prices tumble more than $10/b as market share battle extends selloff

Crude futures tumbled more than $10/b Monday as Saudi Arabia slashed official selling prices, extending a selloff that has largely been in place since late January.

NYMEX front-month crude settled at $31.13/b, down $10.15 (25%), while ICE front-month Brent settled at $34.36/b, down $10.91 (24%).

Crude futures have fallen roughly 47% since January 20, when commodities markets first began reacting to demand destruction caused by the coronavirus outbreak.

The most recent, and dramatic, decline Monday was sparked by expectations that producers would follow Saudi Arabia's lead, driving prices lower in a battle for market share. Saudi Arabia slashed its prices over the weekend after OPEC and its allies last week failed to come to an agreement on cutting production to offset the impact of the coronavirus.

Factbox: Russia, Saudi Arabia fallout leads to possible oil price war

"Saudi Arabia's pricing move over the weekend signaled they are going after market share and all signs suggest they will ramp up production quickly to over 10 million barrels a day in April and possibly another 2 million [b/d] in the short term," said OANDA analyst Edward Moya. "Oil prices should remain heavy in the short term and energy traders should not be surprised if they see prices drop another 20%-40% over the next couple weeks."

The price slide was already having an impact on US shale operators, with Diamondback Energy saying Monday it would reduce activity "immediately."

Analysts believe smaller upstream operators may be especially hurt as their capital budgets are strained and they have less access to funding in a current tight lending market.

The impact on US production may not be felt until later in the year, as companies pull back on spending and lay down rigs. Goldman Sachs analysts said production could be down 250,000 b/d by the fourth quarter, although they said the turnaround could be swift.

"We expect a much faster rebalancing this time around [compared to 2015-2016] as shale and high-cost oil producers were already facing sharply higher costs of capital over the past year due to persistently poor shareholder returns," Goldman Sachs said.

Jefferies analysts said integrated oil companies would need to consider slashing spending immediately, and buybacks and dividend growth would be out of question.

"Now is when a strong balance sheet is most critical and, while all energy equities will be under extreme pressure, Chevron Corp. stands out to us as the best positioned to weather a downturn," they wrote.

A possible silver lining is that the price war could be short lived because both Russia and Saudi Arabia need higher prices to balance budgets, analysts said.

"Let's underscore, Saudi needs $80+ Brent to balance its all-in fiscal requirements, so current pricing in the $30s is not even in the ballpark of what would sustain its economy," said Raymond James & Associates analyst Pavel Molchanov in a note. "Russia's economy is less oil-sensitive, but it, too, would begin to feel real pain within months. Thus, we look at this Saudi-Russia breakup as a fundamentally transitory issue."

Refined products also tumbled Monday. NYMEX front-month ULSD settled at $1.1629/gal, down 22.23 cents, while NYMEX RBOB settled at $1.1369/gal, down 25.21 cents.