Oil Rebounds, But Threat of Russia/Saudi Price War Still Worries Analysts

Meanwhile, another expert dismisses claims that U.S. shale was in Russia's crosshairs: File Image/ PixaBay

Russia stating on Tuesday that it hasn't ruled out measures to stabilize oil markets contributed to crude prices somewhat recovering from the previous session's historic plummet - but analysts  are still worried that the former Soviet Union and Saudi Arabia could ramp up an unprecedented price war.

Brent gained $2.86, or 8.3 percent, to settle at $37.22 per barrel, while West Texas Intermediate  surged 10.38 percent, or $3.23, to settle at $34.36 per barrel in response to unnamed sources telling media that Russia will meet with its oil companies to discuss how to combat eroding demand in the midst of the coronavirus - and whether to prolong its alliance with the Organization of the Petroleum Exporting Countries (OPEC).

On Friday Russia rejected a proposal by the for an additional 1.5 million barrel per day (bpd) production cut, which in turn caused the Saudis to retaliate by vowing to boost its own production.

Indeed, Amin Nasser, CEO of Saudi Aramco, said on Tuesday that the kingdom will  supply 12.3 million bpd in April, well above current production level of 9.7 million bpd; Alexander Novak, energy minister for Russia, countered that his country's oil companies may boost output by up to 300,000 bpd.

Helima Croft, head of commodity research at RBC Capital Markets, called the clash between the two countries "unprecedented."

She said, "We could be in a situation where Saudi ramps up production, and the Russians raise production, so in that type of situation when there's so much concern about demand this would be a really negative impact for oil prices; I think we would be talking about oil in the $20s in such a scenario.

"We have not had a situation before where we've been in a demand crash where the producers have put millions of additional barrels on the market; this would be an almost unprecedented situation."

For his part, Daragh McDowell, head of Europe and principal Russia analyst at Verisk Maplecroft, dismissed earlier speculation that the collapse of the OPEC agreement was part of a plan to undermine U.S. shale production.

He said, "The arrangement was unpopular with key members of the Russian elite - notably Rosneft's Igor Sechin - and the economic damage caused by the COVID-19 outbreak provided a handy pretext for abandoning the deal."

While Russia's statements on Tuesday were credited for helping boost the market, Tuesday's trading was mainly influenced by U.S. president Donald Trump, who vowed "substantial" economic measures to combat the coronavirus' impact.

But as Rebecca Babin, a senior equity trader at CIBC Private Wealth Management, pointed out with regards to oil market activity, "It's all still so fragile and reactionary right now though."