BEIJING, March 10 (Xinhua) — A full-blown oil price war has created an “unprecedented” situation in the energy market, triggering a global stock market crash, as traders anxiously wait to see which of the world’s largest oil producers retreat first. Late last week, OPEC and non-OPEC allies failed to agree on terms for further supply cuts.
The conflict between Saudi Arabia, a core MEMBER of the Organization of petroleum Exporting Countries, and Russia, the leader of non-OPEC member states, has sparked an oil price war. Oil prices have been affected by the coronavirus outbreak, and many are increasingly worried about the prospect of rising oil demand.
International crude oil closed the day at its biggest daily drop since 1991, with WTI closing down 24.59 percent, its second-largest daily decline in history, at $31.13 a barrel, and Brent closing down 21.3 percent at $35.58 a barrel.
Johannes Benigni, chairman and founder of JBC Energy Group, said: “We are experiencing a short period of impact from the outbreak and the twin shocks of OPEC supply. “We are making history. Now you can call it the world oil war. Not everyone is talking about Saudi Arabia’s rivalry with Russia. They may do so, but Russia has always said they want to do more in the shale oil industry. “
“Saudi Arabia is actually declaring war now, ahead of Russia in declaring war on U.S. shale oil,” Benigni said. “
U.S. oil industry ‘definitely bears the brunt’
On Saturday, Saudi Arabia announced a sharp discount on its official price in April as the oil-rich kingdom prepares to increase production to more than 10 million barrels a day, Reuters reported. Riyadh currently produces 9.7m barrels a day, but has the ability to increase production to 12.5m barrels a day.
Saudi Arabia’s decision to cut prices came less than 24 hours after talks between OPEC and Russia in Vienna, Austria, broke down.
On Thursday, OPEC proposed a further 1.5 million bpd cut starting in April and extending it to the end of the year. But Russia rejected the extra cuts at Friday’s energy union meeting. At the end of the meeting, no instructions were issued on production cuts. The current production cuts are due to expire at the end of this month.
Speaking to reporters as he left the meeting, Alexander Novak, Russia’s energy minister, said this meant that OPEC-plus oil producers would be able to produce as much oil as they wanted from April 1.
Chris Midgley, head of global analytics at Standard and Poor’s Global Platts, said on Sunday that “unprecedented circumstances” had created such a situation. That is, oil traders will be watching which of the world’s largest oil producers will “collapse” first.
“While low oil prices will test Saudi Arabia’s fiscal balance, they are the lowest cost of oil and low debt levels that can attract sovereign reserves to tide over the difficulties.” “Russia can simply allow the ruble to depreciate to keep the flow of money into its economy, and U.S. shale oil is bound to bear the brunt of the impact, and with a lot of exploration already under way and a lot of oil being hedged and protected, shale oil production is unlikely to change any time soon,” Migli said. “
“However, some producers use more sophisticated hedging strategies and may find themselves in a variety of predicaments,” he added.
“Russia won’t last long”
“Russia has a flexible exchange rate regime, and the Saudi rial is pegged to the dollar,” Chris Weafer, a senior partner at macro consultancy, said in a research note. “This means that Russia is unlikely to budge first, and certainly not in the next three to six months.” But Russia may think That Saudi Arabia’s finances will be tighter until then. “
Earlier, Russian Energy Minister Novak just said: the performance of the international oil market is within expectations, Russian oil companies have the ability to maintain market share.
“The big targets for both companies are probably marginal U.S. shale oil producers, ” says Chris Weaver. “
It’s reminiscent of the 2014 battle between Saudi Arabia, Russia and the United States for market share in the oil industry. As oil production increases and prices plummet, some believe they will return to these lows.
Ryan Lemond, a senior executive at ADS Investment Solutions, said on Monday that the Gulf Cooperation Council (GCC) has “a large” foreign exchange reserve, putting Middle Eastern countries in a strong position to endure a period of low oil prices.
“Such a strategy can last for one year (or) two years. And other countries can’t. I don’t think Russia will last long, I don’t think it will renegotiate with OPEC, as it did a few years ago.
“So for GCC’s competitors, this won’t last long. I’m not worried about GCC, I’m more worried about other countries,” he added.