Oil climbs on bets Saudi ‘shock and awe’ will force Russia to talk cuts: analyst

Oil prices rebounded on Tuesday following the worst daily price drop in nearly 30 years.

Monday’s decline was prompted by fears of Saudi Arabia flooding the market with cheap crude in a price war with Russia after OPEC talks on cutting production broke down last week. Now, investors may be betting the Kingdom’s strategy will force Russia to the table, or that the heavy-handed response cannot be sustained long-term, according to one analyst.

Saudi Arabia promised a massive discount to its official selling prices for April after the OPEC talks broke down. The Kingdom also announced plans to increase its production from 9.7 million barrels per day to 12.3 million.

“The only reason to view it positively is that it’s such a shock and awe policy, and it's innately unsustainable at that level. It kind of puts a sense into the market that this is going to be a shorter-term price war,” Price Street managing director and market economist Rory Johnston told Yahoo Finance Canada.

“The other possibility is maybe this is such an extreme pressure point, such a big number from Saudi Arabia, that the market is betting this is going to bring Russia back to the table.”

Western Canadian Select, the chief grade produced in Canada’s energy patch, climbed more than 13 per cent to above US$20 per barrel on Tuesday, after sinking to $17.80 on Monday. North American benchmark West Texas Intermediate (CL=F) and European Brent crude (BZ=F) saw roughly 10 and eight per cent gains, respectively.

Johnston said Saudi Arabia’s 12.3 million barrel per day target is above what most experts assume to be the country’s maximum output, which could signal it is willing to tap strategic reserves to dump crude onto the market.

While Russia has announced intentions to up its own production to record levels in response, Energy Minister Alexander Novak said on Tuesday that Moscow had not ruled out measures with OPEC to stabilize oil markets, according to Interfax news agency.

“Maybe Saudi Arabia, instead of drawing this out for many, many months or years, in this battle with Russia... Maybe they’re looking to reshape things, drive things down really, really quickly, and try to pull Russia back to the negotiating table,” Johnston said. “However, anyone who pretends they know what’s going on in Riyadh or Moscow is fooling themselves.”

“There aren’t many parallels in the modern oil market,” he added. “We are flying in relatively unprecedented territory.”