Oil prices on Monday fell by over 30%, the biggest fall since the 1991 Gulf War, after Saudi Arabia slashed its export oil prices over the weekend in retaliation to Russia's refusal to agree to further production cuts.
During a meeting with the Organization of Petroleum Exporting Countries (OPEC) last week, Moscow said it would not go along with members' efforts to stabilize the market by cutting production. Moscow's move further spooked the oil markets, already reeling from a major fall in demand due to the global spread of COVID-19. Several analysts expect oil consumption to fall this year, marking only the fourth annual decline in demand in 40 years.
The OPEC+ meeting, which includes Russia, was supposed to agree to further cuts of 1.5 million barrels per day (bpd), or about 1.5% of global supply, and to extend the existing 2.1 million bpd cuts beyond March. In addition to not agreeing to further cuts to deal with the coronavirus fallout, Moscow even ruled out extending the current production cuts — which was being seen by many as a done deal — virtually putting the 3-year-old OPEC+ alliance in jeopardy.
Russia is said to have argued that it was too early to adopt deeper oil cuts, given that the true impact of the coronavirus on oil demand remains unknown and that troubles in Libya have already led to a reduction of up to 1 million bpd.
"Right now, there is a difference in opinion. The Russians want to stabilize the prices of oil around $50 [€43] a barrel and the Saudis a little bit higher and they didn't find common ground," JBC Energy's founder Johannes Benigni told DW. "The question for me is why have they not managed to carry on with the existing cuts because by pushing prices lower they all will lose."
War on US shale
Analysts say Russia's decision to not agree to bigger cuts was likely driven by its desire to capture market share from US shale companies, many of which have been struggling to stay afloat as oil prices remain low.
Russia has been a reluctant signatory to the alliance amid fears of losing market share to US shale players, which are not participating in output cuts but have benefited from the alliance's efforts to boost oil prices. On the contrary, Russia, whose budget is more resilient to low oil prices than most major oil producers, has been pumping oil at record levels in the past two years. It complied with OPEC+ targets only for three months last year and that too largely owing to a monthslong contamination crisis in its Druzhba pipeline.
Monday's oil price collapse is a further blow to US oil producers, many of which need oil prices to remain at $65 per barrel or higher to break even and have been forced to slash jobs and investments in exploration and production amid low oil prices. Forty-two oil and gas companies went into administration in North America last year, according to the Haynes and Boone law firm. That took the total count of bankruptcy filings by US producers to 208 since 2015, when oil prices crashed.
Riyadh's revenge or negotiating tactic?
Saudi Arabia, the world's biggest oil exporter, hit back at Russia by slashing its April official selling prices by $6 to $8 per barrel, sending the Brent crude down as much as 31% to $31 a barrel shortly after the open on Monday to levels where it was prior to the OPEC's alliance with Russia and nine other non-OPEC oil producers in 2016.
Riyadh's response signals a return to its previous strategy of shielding its market share at any cost. In recent years, Saudi Arabia, which is more vulnerable to low oil prices than Russia with a break-even oil price exceeding $80 a barrel, has been more preoccupied with propping up Brent crude prices than with protecting its market share. Riyadh's last attempt at boosting market share ended in a fiasco some years ago, leading to a collapse in oil prices to around $30 a barrel. US shale players then proved to be more resilient than the Saudis had expected.
Experts expect Saudi Arabia — which has been doing much of the heavy lifting to ensure overall OPEC compliance with the existing output cuts — to flood the market with additional 2 million barrels of oil per day over the next few months, inflicting a supply shock on a market that's already suffering from a demand shock.
"They [Saudis] will now try to produce as much as they can and then try to push others back to the negotiating table," Benigni said. "This is somehow the logical course of action and that means there will now be a period of pain where prices will remain low."
Riyadh's price war means that the struggling economy will once again be forced to dive into its foreign reserves to meet its budgetary needs as has been the case in the past few years. It is also likely to deal a blow to the kingdom's efforts to diversify away from oil. That's why Benigni feels the Saudi's decision to launch a price war may have been influenced by geopolitical interests.
The dramatic fall in oil prices would hurt oil producers across the globe, particularly Saudi Arabia's regional rival Iran, which is already reeling from US sanctions, and Russia's ally Venezuela, also a target of American sanctions.
"It's perfectly reasonable to think that this strategy is aimed at one of Saudi Arabia's neighbors to undermine the political regime there," Benigni said.