10.03.202013:44 Forex Analysis & Reviews: Oil unleashed a war

From love to hate one step, or so, where were we? Where is the dog buried in the conflict between Saudi Arabia and Russia, which led to the fastest subsidence of Brent and WTI since the Gulf crisis in 1991? After a seemingly fruitful 3-year cooperation between Riyadh and Moscow, the cat ran: the Russian Federation did not support the idea of reducing production, the OPEC+ alliance fell apart, and oil prices collapsed to their lowest level in the last four years. However, a quarrel between the powers that can cause a double low. We should not exclude that its goal is another competitor- the United States.

When your attempts to increase your commitments to reduce production do not give the desired result, but, on the contrary, weaken your own position in the market, you should try to change your tactics. The loss of more than half of the value of oil from the levels of January highs hurt American oil companies. At the auction on March 9, they faced a double-digit slump of their share prices, that is, a serious loss of capitalization, which will certainly reduce investment in exploration and production, as well as increase the risks of defaults on bonds. US oil and gas corporations have debts with maturities of up to four years in excess of $200 billion, and Pioneer Natural Resources estimates that half of them may become bankrupt.

On the other hand, the price war between OPEC and the US in 2014 turned out to be a failure for the cartel, and the active use of hedging operations by the Americans allows us to speak of their greater preparedness compared with the events of six years ago.

The situation is exacerbated by the negative impact of coronavirus on demand for black gold. The combination of low interest in oil and substantial supply is extremely rare. According to Rapidan energy Group, this is the most bearish combination since the 1930s, which allows the company to claim that the March collapse of Brent and WTI is only the beginning of the end.

Prices became a bone of contention for yesterday's allies. They are too low for Saudi Arabia and acceptable for Russia. However, in order to punish Moscow, which does not want to participate in further production cuts, Riyadh is ready to make sacrifices. It cut the price for buyers of its own oil by 20% and declared its readiness to increase production to 12.3 million b/d in April. Taking into account the fact that there were 9.7 million b/d in February, we are talking about an increase in the indicator by a quarter.

Dynamics of oil production in Saudi Arabia

Russia can respond by expanding production by 500,000 b/d, up to 11.8 million b/d.it does not have the same network of strategic reserves as Saudi Arabia (Rotterdam, Okinawa and the Egyptian port of Sidi Kerir). At the same time, according to the Blomberg insider, there were actually 30-50% more people who wanted to get discounts from Riyadh. By distracting buyers from the spot market, the OPEC leader contributes to falling prices.

Technically, the daily Brent chart achieved a target of 88.6% on the Bat pattern. If the bulls manage to keep quotes above $30 per barrel in the next few days, the risks of a correction to the downward trend will increase.