Saudi Arabia, the world's largest oil exporter, will increase its production to 12.3 million barrels per day in April following the collapse of a pact between members of the Opec+ alliance, led by the kingdom and Russia.
State-backed producer Saudi Aramco will provide an "increase of 300,000 bpd over the company's maximum sustained capacity (MSC) of 12 million bpd," the company said in a statement to Tadawul, where its shares trade. Aramco "agreed with its customers to provide them with such volumes starting 1 April 2020. The company expects that this will have a positive, long-term financial effect," it added.
The move is a major turnaround for Saudi Arabia, which has been championing production restrictions through the Opec+ alliance since 2017.
Members had been drawing back 1.7 million bpd from the markets since January with the pact set to expire end of the month. Riyadh had wanted a further deepening of cuts by 1.5 million bpd until the second quarter to counter faltering demand due to the coronavirus' impact on the global economy, but Russia refused.
Analysts cautioned that Saudi Arabia is expected to bring back more supply to the market without necessarily increasing its domestic production, which averaged 9.733 million bpd in January, in compliance with Opec+ cuts.
"The distinction is important, as Aramco would likely use a combination of production and oil in storage if there were sufficient demand from customers to warrant 12.3 million bpd," said David Fyfe, chief economist at Argus. "It remains to be seen how much appetite there is from buyers, albeit the Saudis already flagged higher volumes for Asia via their lower price nominations at the weekend," he said.
Expectations of higher Saudi supply has already been priced into the markets, noted Mr Fyfe, citing the price drop of $15 per barrel seen between Friday and Monday.
Saudi Aramco, which issued guidance to the market on Sunday that it would reduce its selling price to Asia by $4 to $6 per barrel, much higher than the cut of $2 per barrel expected by analysts prior to the Opec meeting in Vienna last week.
There were early indications of Saudi Aramco's plans to increase production, with analysts speculating a boost of up to 10.5 million bpd, as the company slashed the pricing for its Arab Light crude grade to Asian customers by as much as $6 per barrel for April.
Brent, the most widely traded crude benchmark, was up 8.4 per cent to $37.25 per barrel, while West Texas Intermediate was up 8.3 per cent to $33.70 per barrel at 5.09pm UAE time. Oil's rebound came as the US considers payroll tax cuts and other measures to support American workers and boost investor confidence after financial markets were roiled by the twin impact of the coronavirus on the global economy and the prospect of an oil price war between Saudi Arabia and Russia.
Early indications of Saudi Arabia's plans to significantly boost production and offer cheaper oil led to prices plunging 31 per cent during morning trading on Monday, marking the steepest daily decline since 1991.
An influx of Saudi supply would come amid the first full-year decline in oil demand in more than a decade, according to the International Energy Agency.
Fatih Birol, the International Energy Agency's executive director, termed the price war unleashed by producers as "playing Russian roulette with the oil market" with possible "grave consequences".
Abu Dhabi National Oil Company followed Saudi Aramco's lead on Monday, lowering the price for its flagship Murban crude by $11.70 per barrel to $56.10 per barrel for February, the company said in a note to its customers.