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Oil futures: Prices tumble 30% on open following Saudi Aramco OSP cuts

Highlights

ICE front-month Brent fell $14.25 on the open to $31.02/b

NYMEX front-month crude futures fell $11.28 to $30/b on the open

Russia, Saudi Arabia, not likely to back down soon: Platts Analytics

New York — Crude futures tumbled roughly 30% on the open Sunday evening, following news that Saudi Aramco cut its Official Selling Prices for April delivery.

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ICE front-month Brent fell $14.25 on the open to $31.02/b, before climbing back to trade around $35.22/b at 2238 GMT. NYMEX front-month crude futures fell $11.28 to $30/b on the open, before rising to trade at around $32.00/b.

The decline followed news that Saudi Aramco slashed pricing of its crude exports for April, including the biggest cut ever for Arab Light crude for Asia, after OPEC and key ally Russia failed to agree to a production cut.

The drop for key export regions of Asia and Europe is likely to set off a price war among producers in the Middle East and Russia, market participants said.

OPEC+ last week had recommended that the existing 1.7 million b/d production cut be extended through 2020 with an additional 1.5 million b/d cut implemented by the end of June, to combat the demand destruction caused by the coronavirus outbreak.

Prior to Sunday's open, benchmark crude futures had fallen roughly 30% since January 20, when the virus first began impacting commodities markets.

If Brent falls to $30/b or lower, the experience from 2014-2016 "indicates Russia, Saudi, and other large exporters could re-coordinate supply policies," according to S&P Global Platts Analytics. "However, the increasingly confrontational nature of recent events makes this scenario highly unlikely for now. Neither Russia nor Saudi Arabia will likely back down, at least until they see where the dust settles, as both have more ability to persevere through price weakness than some other oil exporters or US shale."

In a lower oil price scenario, some analysts believe smaller upstream US operators may be especially hurt as their capital budgets are strained and they have less access to funding in a current tight lending market.

If the present scenario of lower oil prices persists, US shale producers could cut back capital budgets again, building on already expected activity reductions modeled earlier in the year, Rob Thummel, managing director for investment firm Tortoise, said.

"Given the significant change in the environment, every company will reevaluate their plans," Thummel said. In that case, "I'd expect lots of capex cuts in April," released during first-quarter earnings reports.

Under a worst-case average WTI price of $35/b for 2020, US crude production would drop to 9.75 million b/d in 2020 on the year, from a current reference case of 12.95 million b/d and $54/b WTI, according to S&P Global Platts Analytics.

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