US, WASHINGTON (ORDO NEWS) — An unpredictable event that goes beyond forecasts and is fraught with serious consequences is commonly called the “Black Swan.” Such events are extremely rare, and their impact is enormous.
This term was popularized in his 2007 book Black Swan: Under the Sign of the Unpredictable by Nassim Nicholas Taleb, a former options trader.
As if there were few coronaviruses, this month another black swan hit the “black gold”, as they call it oil — a sharp drop in prices took the global markets by surprise, plunging the entire oil industry into shock.
Since early March, oil prices have fallen by about half. Demand for oil is declining, and the industry, according to the press, faces the biggest crisis in the last century.
The fall occurred after March 8, Saudi Arabia broke the agreement on joint control of oil prices, which it concluded with Russia in September 2016. The agreement, which was originally planned to be extended in April, created an informal alliance between the oil cartel, which is run by Saudi Arabia, and third-party producers. As of January, the OPEC + alliance reduced production by 2.1 million barrels per day.
Riyadh and Moscow did not find a common language about the optimal strategy for responding to a colossal drop in demand amid the coronavirus epidemic – when airlines cancel flights and millions of people stop traveling by car.
The Saudis demanded that Russia agree to a sharp decline in prices ( as in the text, although in fact it was a question of the Saudis demand to reduce oil production in Russia, – note by the editorial office of InosMI ). Perhaps, remembering the 1980s, when the collapse of oil prices provoked from outside brought down the Soviet economy, Moscow said no, and a price war broke out. Saudis cut prices and flooded the market with surplus oil.
The collapse in prices hit the United States, one of the world’s leading oil exporters.
Against the backdrop of the coronavirus epidemic, shares of absolutely all American oil companies fell, not just those involved in shale oil. Some of them, who are shining with debts and the threat of bankruptcy, are lobbying for a package of government assistance.
As a result, the Trump administration, according to recent reports, puts pressure on Riyadh through diplomatic channels to reduce oil production. She also threatens to increase sanctions against Russia in order to stabilize prices, according to The Wall Street Journal.
In addition, Texas lawmakers thought for the first time in several decades to reduce oil production.
Obviously, the current situation cannot go on for long. Although oil has fallen in price, there is no demand for it. Due to the slowdown in economic growth, even China does not buy it, although usually it does not miss such an opportunity. Oil prices around the world have affected oil prices — Indonesia, Malaysia, the Philippines, Iraq and Nigeria.
The Saudis went all-in, believing that Russia in this duel would be crushing for strength, that is, it would blink first. But Russia is not burdened with external debt. Along with China, it is steadily buying gold due to the excess of income over expenses, so that it can afford to sit out this confrontation.
But the Saudi economy is mired in debt. Given their budgetary constraints, the Saudis really need oil at $ 80 per barrel to balance the budget, and they really won’t last long at prices of only $ 40 to $ 50.
So sooner or later, the Saudis will swallow an insult and agree with other oil producers to reach something like the previous course. Otherwise, the crisis will become the swan song of the entire industry.
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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.