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

London — Oil prices lost as much a third of their value Monday after Saudi Arabia threw down the gauntlet to the oil market, announcing the deepest cuts in history to its Official Selling Price of crude to key demand hub Asia starting from April.

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After talks broke down between the OPEC kingpin and Russia on Friday over a revamped OPEC+ production cut deal, the likelihood is for a market share battle which will put Russian ESPO crude to Asia under significant price pressure and start to hurt US shale producers.

"We find ourselves in unprecedented conditions where the market will be looking towards which producer blinks first. While low prices will test Saudi fiscal balances, they have the lowest cost barrels and with low debt can pull on sovereign reserves and take the pain," said Chris Midgley, head of global analytics, S&P Global Platts Analytics.

The following are key oil market issues to watch:

TRADE FLOWS

The vast majority of the additional crude supply will come from Middle East producers and Saudi Arabia in particular. Their crudes tend to be heavier and sourer and bought up in large part by complex refineries in China, South Korea, Japan and India. Platts Analytics estimates sustainable Saudi crude production capacity around 10.5 million b/d, but exports from storage could help bring supply to market above 11.0 million b/d in any given month.

**Saudi could raise production from 9.75 million b/d in the first quarter to 10.25 million b/d in the second quarter. Russian output could increase by 300,000 b/d within three months. UAE, Kuwait, and Iraq add another 400,000-500,000 b/d, combined.

**If Brent falls into the mid-$30s/b or lower, the 2014-16 experience indicates Russia, Saudi Arabia and other large exporters could re-coordinate supply policies after the dust settles from the latest meeting.

SHALE EXPOSED

**International Energy Agency Executive Director Fatih Birol on Monday denounced oil producer countries he said were playing "Russian roulette" with markets, adding that an apparent price war was an attempt to "kill" the US shale sector, but was unlikely to succeed and could have "grave consequences" around the world. He said the price crash of the last few days was "more severe" than that in 2014.

**US shale is particularly exposed to lower oil prices. 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 Platts Analytics, a loss of 3.2 million b/d. That would result in the first yearly oil output decrease since 2016.

**In the first of what could be a gusher of oil companies announced plans to slash capital budgets, drilling rigs, activity levels and production growth, Diamondback Energy said Monday it would reduce activity "immediately" to six completion crews from nine, and drop two drilling rigs in April and a third later in the second quarter.

**US refiners may be lured into importing more Saudi Arabian crude as the OSP cuts make Saudi crude more competitive. The US imported just 453,000 b/d of Saudi crude in December 2019, down from 1.1 million b/d in December 2015, US Energy Information Administration data shows.

OTHER RISKS

Other additional supply risks include a faster restart of the partitioned Neutral Zone shared by Saudi Arabia and Kuwait, which could add 500,000 b/d of additional crude capacity to the market. After two years lying dormant, the fields are set to come back online this year.

**Libya's oil output has slumped to as low as 120,000 b/d -- its lowest level since late-2011 when it was again in the throes of civil war. The country was producing around 1.22 million b/d before the blockade of its oil terminals began in mid-January.

**Most analysts expect the Libyan supply disruptions to last for at least a few more months as a political solution looks unlikely. However, a quick return would add to the glut, but would be lighter, sweeter crude than much of the Middle East grades and would tend to go to European refiners.

**Russia 's total crude and condensate production climbed to around 11.28 million b/d in January, up from 11.25 million b/d in December, according to official data.

**Russia's finance ministry hurried Monday to reassure that the national economy could withstand oil prices to fall to $25-$30/b after the ruble hit a four-year low against the dollar. "These funds are sufficient to cover the shortfall in income from falling oil prices to $25-$30/b for six to 10 years," the ministry's statement said.

**Sanctions on Venezuela and Iran has wiped out a combined 3 million b/d from the oil market since their introduction on the two OPEC members.

PRICES

Crude and product prices have experienced some of their biggest price drops since the first Gulf War over fears of a price war.

**NYMEX front-month crude settled at $31.13/b Monday, 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 the demand destruction caused by the coronavirus outbreak.

**Former Qatari oil minister Abdullah bin Hamad al-Attiyah told S&P Global Platts on Monday he expected oil prices could fall below $20/b. "I saw the first shock and the first collapse and this is worse," Attiyah said in an interview. "My expectation is for oil to fall below $20/b. We have seen it before."

**Crude prices could dip to as low as $20/b over the coming months, according to Goldman Sachs, after the failure of Saudi Arabia and Russia to agree to production cuts last week sparked the start of a new price war over market share. The investment bank slashed its Brent oil price forecasts for second quarter and third quarter this year by $17/b and $23/b, respectively, to $30/b, and said prices would dip to "operational stress levels and well-head cash costs" at close to $20/b unless OPEC+ can reach a deal in coming months.

**The May Dubai cash/futures spread -- also known as the Dubai M1/M3 structure and tracked as an indicator of sentiment for Middle East crude -- dropped to minus $1.92/b at the end of the Platts Market on Close assessment process. Monday's close brought the spread to the lowest since minus $2.10/b on January 26, 2016, according to Platts data.

**Crude oil buyers and traders are watching out for other Middle East crude oil producers to issue OSPs to gauge how prices will stack up against Aramco's record cuts this month.

SAUDI OSPs

**The official selling prices in Asia for Arab Light was cut by $6/b to minus $3.10/b, Saudi Aramco said in a March 7 pricing letter. It was the biggest month-on-month cut ever for the Saudi Arab Light crude OSP differential for Asia, according to S&P Global Platts data. Pricing for Extra Light and Arab Medium was also reduced $6/b from March, and Arab Heavy was cut by $5/b.

**The new differential for Arab Extra Light and Arab Light is minus $3.10/b, while it's minus $4.05/b for Arab Medium and minus $4.45/b for Arab Heavy. The differential is against the average of Platts Dubai assessments and DME Oman futures.

**In the Mediterranean, April pricing was cut $7/b for Extra Light, Light and Medium and was reduced $6/b for Heavy. New prices are minus $5.80/b for Extra Light, minus $8.60/b for Light, minus $10.40/b for Medium and minus $10.70/b for Heavy. The differential is against ICE Brent.

**In the US, the differential was reduced by $7/b, to minus $2.10/b for Extra Light, minus $3.75/b for Light, minus $5.55/b for Medium and minus $6.30/b for Heavy. The differential is against Argus Sour Crude Index.

**In Northwest Europe, the differential against ICE Brent was lowered by $8/b for Extra Light, Light and Medium and by $7/b for Heavy. The new pricing is minus $8.10/b for Extra Light, minus $10.25/b for Light, minus $12.60/b for Medium and minus $13/b for Heavy.

**Saudi Aramco has reintroduced a premium for its oil loading in April from the Mediterranean port of Sidi Kerir over the same grades loaded from Saudi Arabia and bound for the Med, after an exceptional arrangement for March cargoes when there was no price gap between the two locations, a representative of the company said Monday.

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