Saudi Aramco plans to increase its crude supply to 12.3 million barrels per day in April, Reuters reported overnight Tuesday, escalating the price war between the kingdom and Russia that helped send global stocks into a tailspin on Monday.
The move would flood oil markets further, further threatening U.S. shale producers and making it more difficult for the domestic economy to heal.
“While this game of chicken between Russian President Vladimir Putin and Saudi Crown Prince Mohammed bin Salman is dangerous for both men to play, the biggest loser might be US shale oil producers,” said Ed Yardeni, president of Yardeni Research in his morning note. “That collateral damage must be appealing to both of them.”
Oil prices experienced one of their most dramatic drops in history Monday, dropping as much as 31 percent and wiping out of hundreds of billions of dollars in market value for the U.S. oil and gas industry. But the sector showed signs of recovery Tuesday despite Saudi Arabia’s supply increase plans: Brent crude was up nearly 8 percent to a little more than $37 a barrel.
Energy stocks which were pummeled amid Monday’s price war fears saw also bounced back in early trading. ExxonMobil was up more than 7 percent in premarket trading. Chevron was up 6 percent and Valero was up 2.75 percent.
Frank Verrastro, senior vice president at the Center for Strategic and International Studies, said the miscalculation between the Saudis and Russians has blunted not only the price of oil but global financial markets.
Some analysts have even speculated the oil prices could reach single digits, which would decimate not only the U.S. shale oil industry, but would have far-reaching effects on producing countries that cannot survive without healthy per barrel prices in the $50, $60 or higher range.
“Egos and miscalculations can lead to a much larger and adverse economic impact if it’s not corrected,” Verrastro said, adding that the turmoil in oil markets is broad and deep. “Markets don’t like uncertainty, and that’s what is going on today.
“Pretty soon, these oil companies are going to have to report first-quarter earnings,” Verrastro said. “That could jeopardize outstanding bank loans. Then there are unemployment impacts, truckers and tankers are not moving oil. Prices on airlines are down, but no one is flying. We are going to need some signal that Russia and Saudi Arabia can resolve this before things get better.”