US, WASHINGTON (ORDO NEWS) — With excess oil production of 10-15 million barrels per day, a simple reduction in production cannot be resolved, so someone should get off the oil train, and most likely it will be Saudi Arabia.
At the negotiations in Vienna on March 6, 2020, Saudi Arabia proposed, within the framework of OPEC +, to reduce production by 1.5 million barrels per day until the end of 2020. Moscow, in turn, advocated extending the deal on the same terms. However, this proposal did not suit Riad. Thus, from April 1, all existing OPEC + oil production restrictions can be lifted.
As you know, from March 9, oil quotes collapsed by 30%. This was the largest single-day fall in oil prices since 1991.
The decline in oil prices spurred a statement by Saudi Arabia on the upcoming increase in oil production from 9.7 million barrels per day, as it was in March 2020, to 12.3 million barrels in April, and then to 13 million barrels per day. Increased production was later announced by Iraq and Kuwait. In addition, Riad began dumping and offering its oil for April with significant discounts of $ 4 to $ 8 per barrel, depending on the type of oil and the region of supply.
Russia’s position on the situation on March 6 is very clear. Moscow believes that it is more important to retain its share of the oil market, rather than having higher oil prices. Since the United States and Brazil, taking advantage of reasonable oil prices and being not bound by production restrictions under the OPEC + deal, they simply increased their market share in oil sales, including at the expense of Russia. In this case, our country has chosen a regular, but lower income. This is a balanced and reasonable position, which applies both to the state budget and to the budget of an individual family.
The cavalry attack of Saudi Arabia with dumping in April failed due to the increase in the cost of freight of tankers by almost 8-10 times – up to 200-300 thousand dollars a day. Such transportation costs only during the journey increase the cost of oil by about 25%, and here we still need to add time for loading, unloading and for a possible downtime. All this nullified the attractiveness of the commercial offers of the Saudis, because their customers refused to take on increased transportation costs.
Currently, a war of attrition has begun. On March 28, the cost of a barrel of Brent crude was $ 25.1. However, it should be borne in mind that the Russian budget for 2020 was planned from the price of Russian oil at 42 dollars per barrel. And Saudi Arabia, in order to have a deficit-free budget, needs an oil price of 83.6 dollars per barrel. It should be noted that there have been no such prices for five years, that is, the kingdom has been living beyond its means for years – with a budget in short supply.
The spread of the new SARS-CoV-2 coronavirus, a serious negative pressure on the oil market, led to a downturn in economic activity around the world and, accordingly, reduced the demand for commodities, including oil.
In the total volume of oil consumption, a little more than 60% goes to the production of fuel for automobile, sea and air transport. In particular, 7–9 million barrels of oil per day are used for fuel for the global aviation industry. Accordingly, the introduction of various restrictions and quarantine measures primarily hit the so-called mobility. Demand recovery will depend on how quickly and efficiently countries cope with the pandemic of the new SARS-CoV-2 coronavirus.
According to the Ministry of Energy of the Russian Federation, now the decline in demand for oil in the global economy reaches 10-15 million barrels per day. The head of the International Energy Agency, Fatih Birol, said at a video conference of the Washington Atlantic Council on March 26, 2020: “Today, 3 billion people in the world are isolated. As a result, global oil demand is in a free fall, and we can see a drop in demand to as much as 20 million barrels per day.”
Before the oil crisis, daily oil consumption in the world was about 100 million barrels. In February 2020, Russia produced 11.29 million barrels of oil per day, including condensate. In the same month, Saudi Arabia’s daily oil production was 9.78 million barrels. The kingdom announced its intention in April to bring it to 12.3 million barrels.
An interesting detail. In October 2018, in an interview with the Bloomberg U.S. agency, Saudi Arabia’s Crown Prince Mohammed bin Salman made a forecast of booming oil demand and the continued prosperity of his kingdom. He also said the following: “We believe that China will sharply reduce production or completely disappear from the market in five years. And other countries will also lose their status as oil producers. After 19 years, Russia, which now produces 11 million barrels per day, should also lose its status. Perhaps Russia will completely disappear from the world market. ”
It is quite obvious that in the current situation in the oil market, Saudi Arabia sees a simple solution for itself – to completely squeeze Russia out of it through price dumping. The Saudis did not succeed with the attack, but Riad is not going to abandon their plans, and pressure on Moscow will continue.
Accordingly, Russia, in turn, should think about which scenario is preferable for our country. The best option is a complete “shutdown” of Saudi Arabia – knocking the kingdom out of the oil market. The disappearance of 12.3 million Saudi barrels of oil per day, as well as the share of American shale oil companies, which at current oil prices are confidently going bankrupt, will lead to the establishment of harmony of supply and demand in the global oil market.
As for the choice of means and methods that our country can use in this situation, taking into account the seriousness of the challenge and the fact that our actions will be reciprocal, almost any means are good.
Moreover, the option of waging an oil war of attrition with the Saudis for several years seems very costly and quite risky in terms of falling revenues of the Russian budget and increasing social tension in Russian society. Again, the cumulative negative effect of the ongoing pandemic of the new coronavirus must be taken into account.
Here we need a solution in the spirit, as the Russian Demiurge television channel recently described : “We heard the prophecy of an old man that a meteorite could fall from the sky in the summer heat of Arabia, which would deprive one of the largest oil suppliers of world oil production …”
By the way, the forecast of Goldman Sachs bank analysts also speaks in favor of a tough scenario. In their view, any attempts to save the oil market and avoid keeping raw material prices at such low levels over the long term are hopeless. Experts are sure that even if the United States, Saudi Arabia and Russia jointly reach an agreement to freeze or reduce production, it will not be enough.
Goldman Sachs estimates that in March 2020, the decline in demand will be 10.5 million barrels of oil per day, and in April – 18.7 million. In the second quarter of 2020, an average daily excess of oil is expected in the daily volume of 14 million barrels.
The conclusion is unequivocal: with such large excess volumes of oil production a simple reduction in production cannot resolve the issue, so someone should get off the oil train first. And, most likely, it will be Saudi Arabia. “Fear the anger of the patient, fear the quiet words …”
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The article is written and prepared by our foreign editors from different countries around the world – material edited and published by Ordo News staff in our US newsroom press.