Saudi Arabia will supply the oil market with 12.3m barrels a day in April, marking a dramatic escalation in its price war following the collapse of a production agreement between Opec and Russia to stabilise the market.

The level is more than 2.5m barrels a day above what it was previously producing and greater than Saudi Arabia’s maximum sustained production capacity, suggesting that the kingdom will take barrels from storage to flood the market rapidly as it takes on rivals in a fight for market share.

Olivier Jakob at Petromatrix said Saudi Arabia was pursuing a “shock and awe” strategy to demonstrate it had the capability to raise supply faster than any other producer.

“Saudi Arabia is going all in on trying to disrupt the oil market,” said Mr Jakob. “Over the weekend they signalled a price war and now this has gone straight to a volume war. The market does not need that much crude oil. They are dumping the oil from storage.”

The start of an oil price war at a time when demand is falling due to the coronavirus crisis triggered one of the biggest one-day price falls in history on Monday, roiling global financial markets as crude fell by as much as 30 per cent to nearly $30 a barrel.

While markets stabilised on Tuesday, with Brent crude trading near $36 a barrel, traders and oil producers are bracing themselves for a protracted period of lower oil prices as tensions between Saudi Arabia and Russia — the two largest oil producers outside the US — worsen.

Russia balked at a Saudi Arabia-led proposal for deeper and more prolonged cuts to stabilise crude prices last week, effectively collapsing its three-year-old agreement with the kingdom to try and prop up crude markets.

In response, the kingdom slashed export prices for its crude and said it would raise output, but the plan to supply 12.3m b/d is a faster and more aggressive increase than many oil traders were anticipating.

Saudi Aramco has said it has spoken with customers and agreed to supply them with these levels starting from next month, according to one person familiar with the matter. The level is above what Saudi Aramco says is its maximum sustained production capacity of 12m b/d, the level at which the kingdom believes it can consistently produce for long periods of time.

Just as news of the Saudi supply increase reached market participants, Russia’s energy minister Alexander Novak responded by saying it too could raise production by a further 500,000 b/d in the “near future”.

But Russia does not hold the same kind of spare production capacity as Saudi Arabia, which for decades has kept oilfields in reserve that it can tap to raise output in weeks or months.

Russia has been an unwilling participant in joint production cuts believing they only subsidised the US shale industry, which has captured market share from rivals over the past decade. Moscow, which is irate with the Trump administration for sanctions against its energy sector, has spotted an opportunity to target the US economy.

The US Department of Energy said late on Monday that the price war amounted to “attempts by state actors to manipulate and shock oil markets”, adding that the US as the “world’s largest producer of oil and gas, can and will withstand this volatility”.

Prince Abdulaziz bin Salman, Saudi Arabia’s oil minister, said last week that any production cut deal would depend on the participation of major producers, including Russia, which it believes has been shirking off its share of existing supply curbs.

Some energy analysts believe that the game of brinkmanship is intended to lure producers back round the negotiating table. The so-called Opec+ alliance has helped to stabilise prices, even as it allowed the US shale industry to thrive.

Mr Novak on Tuesday said on Russian television that the “doors are not closed” for more future co-operation with Opec countries on oil policy.

But others do not believe a rapprochement is coming any time soon, meaning the most economically vulnerable Opec producer nations will be hit hardest as will the budgets of energy companies.

Additional reporting by Max Seddon and Nastassia Astrasheuskaya in Moscow

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