Oil Falls As Russia Reportedly Escalates Price War

Oil Falls As Russia Reportedly Escalates Price War
Oil tumbled after Russia reportedly raised oil output, signaling the producer's commitment to its price war with Saudi Arabia.

(Bloomberg) -- Oil tumbled after Russia reportedly raised oil output, signaling the producer’s commitment to its price war with Saudi Arabia.

Futures in New York lost as much as 6.5%, erasing earlier gains. Russia boosted crude production immediately after the March 6 OPEC+ meeting that ended in the collapse of the coalition, Interfax reported. That dampened optimism that U.S. President Donald Trump might intervene in Russia’s standoff with Saudi Arabia, and outweighed news that Texas’s main oil regulator is considering curbing output for the first time in almost half a century.

“Supply and demand are both working against crude oil right now,” said Bob Yawger, director of the futures division at Mizuho Securities USA. “The first level of support has to come from the supply side to stabilize this downward spiral.”

The decline comes after the U.S. benchmark crude had its best day in history on Thursday, rising by a record 25% after Trump said he might step into the Saudi-Russia fray.

“Since then, the rhetoric out of Russia is more terse,” said Phil Flynn, senior market analyst at Price Futures Group Inc. “Volatility is going to persist until we see a resolution. Nobody wants to blink first.”

The market is still bracing for a slump below $20 a barrel, according to a Bloomberg survey. The price war is a “lose-lose strategy” for the kingdom and Russia, with a challenging fiscal outlook for both countries if crude holds below $40 for a protracted period, analysts at MUFG Bank Ltd. said.

Texas, the world’s third-largest producer, is weighing production curbs to stem the price rout. Ryan Sitton, one of three voting members of the Texas Railroad Commission, the state’s energy regulation, is proposing that the U.S. coordinate with Russia and Saudi Arabia to curb supply.

“With other governments manipulating oil markets, it’s fair to ask: Why shouldn’t our government step in to try to reinstate a more market-based approach?” Sitton said in a Bloomberg Opinion column. “It would stave off a total oil industry meltdown.”

The plan comes as the nearest timespread for the U.S. benchmark indicated its deepest oversupply since 2017 this week.

The American shale industry has found itself caught in the middle of the fight between Saudi Arabia and Russia. The sector has so far scaled back operations and is also threatened with a wave of bankruptcies.

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Len TIAHLO  |  March 21, 2020
Russia unlikely to show weakness and Saudis hate loss of Face. Rising costs of storage netbacks to lower pricing dynamics + second half 2020 would see IOC hedges exhausted and US credit tightened.