The Oil Collapse Isn’t Over Yet

Welcome to $30 Oil, But It Could Be Lower 

Last week, Saudi Arabia threatened to flood the market with oil. This week, it did just that. 

Aramco has been ordered to raise output capacity to 13 million bpd (from 12 million bpd), and it's also going to slash its selling price by $6-$8 per barrel. Aramco will also load 300,000 bpd more for its customers in April, raising exports for the month to 12.3 million bpd.

If you thought the market was bad before this, consider that Aramco's highest known production rate was 11.9 million bpd (back in November of 2018). 

The UAE is also boosting production by 1 million bpd, and capacity by the same, while adding a 15% discount to prices - but what it really wants is for the Saudis to back down.  

But as we speak, the Saudis are shoring up their market share in Russia's European backyard, with the first cut-rate shipment heading for the continent as of late Wednesday. They're hoping to supply European refineries with three times as much crude as usual. And refineries are biting, of course, because of the major discount which works out to be about $25/barrel, pricing out Russia's Ural's. 

Russia is fighting back with its own production increase threats (between 200,000 bpd and 300,000 bpd in the short term, and 500,000 bpd longer term). 

For the market, it's the worst oil price crash since the 1990s. On Monday, prices sunk 30%. By Thursday, the world was welcoming $30 oil - with WTI just holding under $31 and Brent holding desperately to $33. 

There are two key questions now. Firstly, will the Saudis or Russia back down? And secondly, is U.S. shale the real target here?

The likely answer to the first question is that the Saudis can hold out for a bit longer, and they are prepared to hold on all the way down to $15 oil before they blink. It was already clear that MBS was willing to take this further, for longer when he advised ministries and government agencies to revamp their budgets to cut up to 30 percent off because the revenue cuts are imminent. The oil price war could last a couple of months, but both sides will likely have found a way out that makes each look like a winner before the G20 - which will be MBS' moment to shine. On that subject, the reports of arrests of rival princes and the potentially pending death of the King should not be taken as indicators that MBS is in trouble and feeling threatened: His hold on power is solid, and while the princes are an annoyance for him, they do not at this point pose a real threat. 

The answer to the second question is, no, U.S. shale isn't the ultimate target. Despite the threat that US shale poses to Saudi oil prowess, MBS has no desire to destroy the American shale patch, nor does he wish to rock the boat with Trump, his one true ally through very trying times. 

Tesla, Coronavirus and A Temporary Setback

Tesla might have been having a break out year, but not even Musk can escape the impact of the coronavirus: Morgan Stanley's Adam Jones cuts his price target on Tesla from $500 to $480 on Thursday, citing lower expectations of growth outside of China precisely because Tesla's top-spot EVs are pretty much a luxury item still. 

But it doesn't pay to be too bearish on Tesla, even amid the COVID-19 threat. The company just produced its millionth EV and is worth more than GM and Ford combined. There's really no stopping it at this point and the momentum is something the other auto giants just can't seem to replicate. With a new factory in China and a second new factory in the works in Germany, and a third planned for Nashville, Tennessee, it's full speed ahead. 

So, yes, the virus isn't very convenient and will take a chunk out of China manufacturing and Chinese demand for its luxury EVs, but Tesla will do what it always does: Defy things.