Russia and Saudi Arabia have decided to dig deep into the oil market. The complex cooperation between Russia and OPEC (actually Saudi Arabia), which was described as “OPEC +”, failed with a major blow.
Just a few days ago, Saudi Arabia demonstrated that it was keen to reduce oil production in order to balance supply and demand in this market against the background of a markedly slower global economy and thus help to support the price of this resource.
However, in this mission, this country has looked quite lonely lately. At the same time, it put pressure on Russia, which sounded something like this: “we will cut our oil production by another million barrels a day, but only if you do it for 500 thousand barrels (a day). If you don’t, you run the risk. with the opening of our oil locks and the ensuing collapse in prices “.
Accordingly, as we have seen now, not only have these latest restrictions on oil production not been adopted, but the previous OPEC + agreements on oil detention have been repealed. Or the oil powers did not choose to pursue a more or less common policy, but instead to fight for market share. Well, it seems everyone in this market is on their own and is going to pump as much as they can. It is not for nothing that the price of oil approached 30 US dollars per barrel this Monday (although the price recovered on Tuesday).
Perhaps it can even be said that the biggest geopolitical victim of the coronavirus so far is the cooperation between OPEC and Russia for about five years, and thus the oil market. In any case, additional floods in the oil market are expected during the period under review. For example, the assumption that the Russian government Rosneft will grow its black gold mining by 300 thousand barrels a day has been cemented. This will be done to protect market share against the background of cheap Saudi oil, according to approaches information.
However, it is possible that at some point there will be an agreement (and this is just a kind of part of the discussion). This is because without it, the future for these oil producers was not very bright.
Russia looks prepared
What is happening has and will have a huge impact on various processes in the world – after all, oil is and will remain the world’s main raw material. For many oil producers, this situation will mean tightening their belts. This is likely to mean the same for Russia, which needs an oil price of around $ 40 a barrel (to keep its budget balanced). In general, it can be said that Russia is much better prepared for a price war this time. Thus, some argue that Russia may be able to live with oil prices of $ 30 to $ 40 a barrel in the corridor for even a few years and wait for low prices to unprepared for all black gold miners with higher barrel costs. For example, it may cause some problems for the US shale oil industry at some point.
Saudi Arabia, on the other hand, needs an oil price of around $ 80-90 a barrel to keep its budget balanced. This is despite the fact that the cost of extracting oil for one country is only three US dollars, writes the financial news portal Barron’s. In any case, the cheaper the oil, the longer the phenomenon, the greater the likelihood of crisis and even unrest in many of these countries.
Will all OPEC break down?
First of all, the relatively new formation OPEC + has been lost for the time being. However, it is believed that no particularly good scenarios await the whole of OPEC as a formation in the future. In essence, the potential for additional oil supply has grown rapidly and, while one country commits to extract less oil, the other is pumping more and gaining market share. Lately, this seems to have been the fate of OPEC. As long as the cartel tries to withhold oil and hold a much higher price, it threatens to lose market share. In addition, there have been occasional judgments that OPEC countries themselves should be seen as competitors who, under certain circumstances, may resume open competition for markets rather than pursue a common strategy.
Thus, in recent years, there has been repeated talk of the collapse or even potential collapse of this oil exporter formation. OPEC’s cooperation with Russia (in order to give more weight to their overall decisions in the oil market) was not to the liking of all the cartel members themselves. This situation has, for example, given other OPEC countries additional reason to believe that their views are becoming less important. As early as the end of 2018, Qatar announced that it would leave the OPEC group after 60 years of participation. State officials at the time suggested that Russia’s cooperation with OPEC was another signal that it no longer needed the cartel.
The history of OPEC’s quota reduction decisions is not flattered by history either. Back in 1979, OPEC countries accounted for more than 50% of world oil consumption (now a third). In 1980, the cartel reduced its quotas for mining gold in order to balance the situation on the oil market. The resulting vacuum in the oil market was rapidly filled by black gold from the North Sea and Alaskan oil fields, and OPEC began to lose market share.
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