Saudi Arabia cut export oil prices this weekend in what could be the start of a price war targeting Russia, but with potentially devastating repercussions for Russia’s ally, the Venezuela, the Saudi enemy, Iran and even the American oil companies.
The effects were quickly felt, as the world benchmark Brent oil price collapsed by about $ 11 per barrel, or 25%, Sunday night in the largest decline since at least 1991, and futures contracts on the stock markets fell about 3%.
Saudi move to cut prices by nearly 10 percent on Saturday was a dramatic move in retaliation for Russia’s refusal on Friday to join the Organization of the Petroleum Exporting Countries in a sharp cut in production as the coronavirus continues to slow the global economy and, with it, demand for oil.
This decline added even more uncertainty to the global markets already disrupted by the coronavirus. Australian stocks plunged Monday morning in the Asia-Pacific region, falling 5.9%. Tokyo stocks fell 4.7% and Hong Kong opened 4.1% lower. Futures markets have shown big losses for Wall Street and Europe when they open later on Monday.
The breakdown of a three-year alliance between the Saudi-led oil cartel and Russia to support prices could be temporary. Movements over the weekend may well have been part of a negotiation chess game, and the Saudis and Russians can still reach a compromise. But if the collapse is lasting, oil sector leaders say nothing prevents oil prices from falling to the lowest levels in at least five years.
“If a real price war ensues, the oil markets will be very painful,” said Badr Jafar, president of Crescent Petroleum, an oil company in the United Arab Emirates. “Many will prepare for the economic and geopolitical shocks of a low-cost environment.”
A significant drop in oil prices would hurt producers around the world, particularly in Venezuela and Iran, whose oil economies are already under pressure from US sanctions. Both countries’ export earnings have already been cut to a net, and a further drop would stretch their ability to pay for vital services and security.
The only bright spot can be at the gas pump. The average price of a gallon of regular gas in the United States, according to the AAA Motor Club, has already dropped by five cents last week, from $ 2.45 to $ 2.40, and prices could easily drop below $ 2 a gallon in some states in the United States. weeks to come. Low-income drivers, who typically own older, less fuel-efficient vehicles and spend a higher percentage of their wages on energy, will be the most likely to earn.
But a prolonged collapse in prices would add to financial pressure on heavily indebted US oil companies, dozens of which have shut down in recent years, with a likely drop in US oil production. Oil companies have laid off workers in Texas and other oil-producing states.
The development of Canada’s oil sands, already lagging behind due to environmental concerns and costs, risks being hit hard by a price war. And oil-dependent developing countries like Nigeria, Angola and Brazil can experience significant economic downturns.
The first big impact was felt by Saudi Arabia itself. Shares of Saudi Aramco, the Saudi national oil company, fell more than 9% on Sunday, falling for the first time below its December retail price of 32 riyals.
The Riyadh stock market fell more than 8%. On the Kuwaiti stock exchange, trading on a major index was halted after falling 10%.
As they lower prices, the Saudi authorities are now preparing to increase oil production in the kingdom to compensate for the loss of income caused by the fall in prices. China, the largest importer of oil, has historically purchased oil at low prices to store it for future use when prices rise.
Low oil prices, now around $ 34 a barrel for Brent crude oil, the international benchmark, and around $ 31 a barrel for West Texas Intermediate, the US marker, could also fuel public discontent with governments, including Saudi Arabia, because falling incomes mean less money for social activities and other programs used by governments to build support.
Saudi Arabia is the world’s largest oil exporter and produces about 9.7 million barrels per day, well below its capacity of around 12 million barrels per day.
Whether oil production helps the kingdom is another matter. There is no easy cure for the plight facing Saudi Arabia and the rest of the oil industry. The world is inundated with oil, analysts say, and demand will likely continue to decline.
The prospect of an increase in oil on the market could accelerate the collapse of prices, which have fallen by about a third this year.
Russia and Saudi Arabia seem to be acting for short-term advantage with risky strategies. Russia has acquired significant political weight in the Middle East by aligning with OPEC. Helping to support oil prices in concert with Saudi Arabia and other Persian Gulf states has helped President Nicolás Maduro’s government survive in Venezuela. Now the Russians have chosen to go it alone, refusing to coordinate with OPEC the proposed production cuts, perhaps in the hope of undercutting American oil producers.
For Saudi Arabia, cooperation with Russia has added weight to OPEC at a time when it is threatened by the recent surge in US oil production that has made the United States a major exporter of crude oil for the first time in decades.
“Saudi Arabia is protecting its market position from the collapse in demand for oil, a declining physical market and dramatically reduced prices,” said Sadad al-Husseini, former executive vice-president of Saudi. Aramco. He argued that Russia and Saudi Arabia “would come out of this bear cycle as stronger players, while shale oil, the oil sands and other expensive or politically unstable producers are struggling to finance”.
But their success is far from certain.
The last time Saudi Arabia and other OPEC members allowed global supplies to increase in the face of increased oil volumes from shale producers in the United States was in late 2014 , and prices fell to less than $ 30 a barrel. Two years later, Russia partnered with OPEC in a production pact that has helped support prices for the past three years by coordinating production cuts.
But OPEC’s intention in 2014 to undercut American and other producers turned against it and reduced its market share. The US oil companies still managed to increase production, as they became more efficient in shale drilling, and investors continued to pour money into their businesses. This time may be different, as Wall Street has grown tired of the low returns on oil investments and the high debts of many small and medium-sized businesses.
At meetings at OPEC headquarters in Vienna last week, Russia refused to accept a Saudi-led proposal to cut 1.5 million barrels a day, or about 1.5% of the l ‘global supply, to meet the declining demand due to the spread of the coronavirus epidemic. The two sides also failed to agree on an extension of the current reductions of 2.1 million barrels per day. This failure paves the way for increases from producers who have additional capacity.
“If you are from Russia, it is worth taking a three-month price to see if you can eliminate US oil exports,” said Amy Myers Jaffe, oil and Middle East specialist at the Council on Foreign Relations . “They could be fine for three months, but the shale will never be destroyed.”
She said the divergence between Saudi and Russian strategies “signals that the relationship between Saudi Arabia and Russia is getting out of hand.”
In a report released last month, the International Energy Agency, the Paris-based monitoring group, said the Saudis could produce more than 2 million barrels a day more while the United Arab Emirates, the Kuwait and Iraq could add around 1 million barrels a day between them.
Falling prices are a huge problem for Saudi Arabia and other oil-dependent countries. Low prices are eroding the oil revenues that support the public budgets of these countries.
Jim Krane, an analyst in the Persian Gulf at the Baker Institute at Rice University, said oil prices were already well below the $ 80 a barrel level that the Saudis need to finance public spending.
A drop in Aramco’s share price could damage the prestige of the country’s main decision maker, Crown Prince Mohammed bin Salman. He led the campaign to bring Aramco to public markets, and many Saudis bought shares.
The crown prince’s ambitious and costly economic development program, known as Vision 2030, could also be in trouble, said Krane, if oil producers turned on the taps and lowered prices.
“A price war would cause the Saudis to suspend the entire Vision 2030 diversification plan while the kingdom overturns austerity wages,” said Krane.
In what may signal growing political unrest in the kingdom, the prince has detained members of the royal family were considered potential rivals for his authority.
