The real reasons for the fall in oil prices

US, WASHINGTON (ORDO NEWS) — What happens when many people produce more and more commodities, but fewer people want to buy them? Economics for preschoolers. No need to guess for a long time to find the right answer. And here is another, more complex question: who is to blame for the current drop in oil prices?

Saudi Arabia? Russia? USA? Coronavirus outbreak? In fact, all of the above. But how did each of them contribute to the crisis? Finding the answer to this question is more difficult.

Saudi Arabia was the world’s largest oil producer and the world’s cheapest oil producer. The kingdom had a lot of leverage when it came to controlling oil prices. Prices moved in the direction that Saudi Arabia needed, which either closed the taps or opened them, flooding the market.

This was the last thing the kingdom did in 2014, when the United States clearly felt its presence in the international oil market. The goal of Saudi Arabia was to stifle growing competition. Unfortunately, something went wrong. Prices fell from $ 120 per barrel to $ 30. Everyone was affected, including Saudi Arabia.

Now the kingdom wants to punish its price control partner, Russia, for refusing to cut most of its production to support prices. Although there are those who believe that the target is the US shale.

Prices react in the only way that they can.

Thus, Saudi Arabia fired the first shot at a price war in the oil market. But is it? Saudi Arabia announced plans to increase oil supplies to 12.3 million barrels per day from 10 million barrels per day on Sunday when the OPEC + meeting in Vienna did not take place, because Russia refused a deeper reduction. But this is not all of Russia, said Russian Energy Minister Alexander Novak.

On that fateful Friday, he noted that from April Russia will restore production volumes reached before the conclusion of the agreement. This will increase production to 300 thousand barrels per day or up to 500 thousand barrels per day. Although 300 thousand to 500 thousand barrels per day.

This is not 3 million barrels per day that Saudi Arabia threatened to add to a crowded market, however, Russia’s refusal to cooperate in reducing production was seen as a step that triggered a reaction from Saudi Arabia. Moreover, some believe that the US shale industry was the real target of Russia.

American oil and the American shale industry, in particular, are accused – or praised, depending on their prospects – of changing the balance of power in the oil market over the past couple of years. American shales are a force to be reckoned with. According to the latest EIA report, daily shale oil production exceeds 13 million barrels per day.

As a result, the United States has become the world’s largest oil producer and has significantly increased its presence in international oil markets. Despite local production, they did not become self-sufficient in terms of oil, but reduced their dependence on imports, becoming an exporter who could compete with Saudi Arabia and Russia.

The extent to which American shale oil production changed the balance in the global oil arena was not immediately obvious, as OPEC and Russia continued to reduce production, and price increases were not observed due to sluggish demand prospects, and also because American shale producers continued to produce more and more and more oil. And while OPEC + made reductions, the boom of shale oil production continued to gain momentum.

It wouldn’t end in anything good.

Now Saudi Arabia is increasing production, US shale oil producers are cutting, reducing costs and the load on drilling rigs. Debt payments are approaching, and although many of them are insured against low prices, the question of how much more money is enough remains an open question: shale producers burn money for months, not years. Back in 2017, Harold Hamm of Continental said when prices recovered that American shales should be careful not to dig a hole for themselves. History repeats itself. Only this time it’s worse, because a pandemic is raging in the world.

At the time of writing, the outbreak of the virus, which began in China in December, claimed the lives of almost 14,700 people worldwide, 339 thousand people in dozens of countries were infected. A state of emergency was declared, many were transferred to distance work and training, the number of air travel fell sharply. In a word, this is the strongest shock for the demand for oil in the industry.

How serious the impact of the pandemic on prices turned out to be is easy to understand from the example of revising the forecast of oil prices in investment banks. Earlier this year, they predicted $ 50 a barrel, when the virus was just starting to spread in China. Now some are predicting that Brent will drop to $ 10 per barrel if the current situation remains unchanged. The world simply runs out of storage space.

According to OilX estimates, about 750 million barrels of oil are stored in the world both on land and at sea. According to some analysts, the oil analytical company notes that these figures can reach 1 billion barrels against the background of the current situation with demand and supply.

You can argue for a long time who is to blame the most. But the fact is the fact: if something does not change quickly, oil will begin to fall. On the other hand, the economies most affected by Covid-19 will recover a little easier.


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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.