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The oil markets will be a long way away from being in balance as an all-out price war rages. Will US shale producers be the first casualty? Image Credit: AP

In the seminal book The Art of War, Chinese author Sun-Tzu wrote, “In the midst of chaos, there is also opportunity.” Sun’s prose pertained to military strategy, but is apropos to Saudi Arabia’s bold move to surprise global oil markets and regain market share.

The world’s number one exporter went to Opec headquarters in Vienna the first week of March to lobby other major oil producing nations to make deeper production cuts, rebalance oil supplies and lift prices. Saudi Arabia’s energy minister, Prince Abdul Aziz Bin Salman, the eldest son of King Salman, cajoled fellow ministers of the Opec+ group to deepen cuts last December to 1.7 million barrels a day, kicked in another 400,000 of its own production in February, and was seeking a further cut of 1.5 million barrels to counter the impact of falling demand due to the coronavirus.

Senior Opec sources who were present at the closed-door meetings told CNN Business that the Kingdom left little wiggle room for negotiations by seeking to extend the cut through 2020, without getting back room buy-in from his Russian counterpart Alexander Novak. After taking direct instructions from President Vladimir Putin, Novak walked out on the Saudi initiative.

He told reporters after the meeting that come April 1, producers would be free to make their own production decisions, no longer handcuffed by the collective approach to market management.

No holding back

Saudi Arabia was the architect of the Opec+ structure with a strongly held position that a balanced, stable market was good for prices and long-term investment into the oil and gas sector. After Russia refused to budge, the Kingdom deftly altered its game plan and intensified what many described as an artful, but intense, three-pronged strategy.

The Kingdom’s first order of business was to drastically increase production from April 1 by 2.6 million barrels a day, to a record 12.3 million barrels. The next day, Saudi Aramco announced it would slash prices to preferred customers by $6-$8 (Dh22-Dh29.3) a barrel. The moves shocked the energy market, with the biggest one day fall in crude since 1991.


With market losses mounting, Prnce Abdul Aziz then instructed Aramco to accelerate previous plans to increase capacity to 13 million barrels a day by the end of the year. Regional ally the UAE then weighed in, with the Abu Dhabi National Oil Company (Adnoc) pledge to add one million barrels a day to the market in April and step up plans to expand its production capacity to five million barrels.

Two weeks prior to that decision, the group CEO of Adnoc underscored the importance of being cost competitive when the market was oversupplied and prices were already in retreat due to the coronavirus. “Our job at this point and time and at all times is to stay very agile and very resilient,” said Sultan Al Jaber before an audience of global energy executives in Riyadh.

For those who follow the oil market, it was clear with a bit of hindsight that the Kingdom and other regional heavyweights wanted to send two key messages to both producing and consuming nations:

* Message number one: Saudi Arabia can flex its muscle and show the world what it feels like, without the Kingdom serving as a global energy shock absorber to an oversupplied market even when countries such as Russia and Venezuela chose to skirt their production targets. Saudi Arabia’s new energy minister, when given the reins back in September, declared it would have to be a collective effort.

* Message number two: If the energy world was truly left to free market forces, the producers of the Gulf will be the last ones standing. Their average cost per barrel — leading consultants tell me — is $2-$6, the lowest in the world and a fraction of what it takes to unlock crude from shale rock in the US.

S&P Global this week noted that medium sized American producers Apache, Devon and Murphy Oil already slashed their budgets by a third due to the global market collapse and their debt mountains. They cannot play hardball with their state-owned counterparts of the Middle East.

Medium term, the low-cost producers are also acutely aware the energy transition has begun in earnest, with wind and solar power more competitive than ever before — so this is the window to grab market share.

No chance for a compromise

Saudi sources said this modern day “art of war” was not in the Vienna plan. They talked about working tirelessly to pursue a different outcome — reiterating that the Russians came to Opec headquarters unwilling to support a balanced market with higher prices and determined to end the expansion of US shale producers.

US energy companies are clearly being caught in the crossfire, with oil prices down more than 50 per cent from their January peak and at the lowest level since early 2016. The US Energy Information Administration said American oil output would rise by a slower than expected 760,000 barrels this year and drop by over 300,000 in 2021.

Today, the US remains the world’s largest producer. Come April, Saudi Arabia will take the number two slot

- John Defterios of CNN Business

That may seem an underestimate considering how fast the market is changing.

Today, the US remains the world’s largest producer. Come April, Saudi Arabia will take the number two slot with Russia dropping down a notch, with limited capacity to expand. Some believe this price war will not be complete until the Kingdom re-emerges as number one.

— John Defterios is Emerging Markets Editor at CNN Business.