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(Bloomberg Opinion) -- The impact of Saudi Arabia’s decision to increase oil production amidst the demand-killing coronavirus pandemic may not be over yet. Three weeks ago, in reaction to Russia’s decision to pull out of the OPEC+ production cut deal, Saudi Arabia promised to increase its oil production to an all-time high of 12 million barrels per day in April. It also committed to putting an additional 300,000 barrels per day from inventory on the market. This oil was offered to customers at heavily discounted prices. Global oil prices plummeted almost immediately into the $30 per barrel range; since then, they’ve fallen even lower.
This was a huge gamble by Saudi Arabia. From a market perspective, the point was to increase demand for Saudi oil by offering it to customers at cut-rate prices. From a business perspective, Saudi Arabia made this decision before it realized how low prices could go, so high volumes were expected to counteract lost revenue per barrel from the discount. From a political perspective, the point was to show Saudi Arabia’s control over oil markets. With April now upon us, Saudi Arabia is in danger of failing spectacularly on all three accounts. If Saudi Arabia loses on its bet, the global price of oil will lose, too.
Saudi Arabian Oil Co., the kingdom’s state-owned oil company, will find itself in a very difficult situation if doesn’t have customers for all the oil it has committed to producing. Leftover, unsold oil sitting in tankers off the coast of Saudi Arabia will make the kingdom look weak. Aramco and the kingdom would face severe revenue drops, hurting Aramco’s share price just months after its IPO while undermining the overall economy and the monarchy’s political dominance. Furthermore, because of over-production, the health of the country’s oil reserves would be put at risk for no gain.
But large amounts of unsold Saudi oil would also send global oil prices plummeting even further, possibly into the teens and even the single digits. At first, when Aramco released its Official Selling Prices (OSPs) for April, customers seemed excited to stock up on cheap oil from Saudi Arabia. According to Bloomberg News at the time, it looked like Saudi Arabia’s lower prices were enticing customers to increase their purchases by as much as 50%.
However, now that oil demand across the globe has been slashed due to shutdowns designed to prevent the spread of coronavirus, doubt is mounting that Saudi Arabia will, in fact, be able to sell the extra oil it intends to produce. Anecdotal evidence suggests that Aramco is having a hard time finding buyers. But although anecdotal evidence from a few refineries can impact market sentiment, it is not determinative of what is actually happening.