US fears economic war with Russians and Saudis
US, WASHINGTON (ORDO NEWS) — Oil prices fell sharply at the beginning of the week due to the economic impact of the coronavirus pandemic. The price of a barrel (159 L) of North Sea Brent is now at $ 22.8, below the level of November 2002. Then, oil prices were under pressure as a result of the terrorist attacks of September 11, 2001. The price of a light American WTI variety is $ 20.22, and at night for a while it fell below $ 20.
After Russia and Saudi Arabia could not agree on joint action about three weeks ago amid falling demand due to the coronavirus pandemic, oil prices fell sharply. Since then, oil has fallen in price twice.
The decline in demand due to the pandemic is unprecedented: according to analysts in recent weeks, it amounted to about one quarter of the usual. Since 1965, the demand for oil decreased only in the period from 1979 to 1982 by 7.5%, and also in 2009 – by 1.4%.
After the conflict with Russia, Saudi Arabia, despite the current situation, significantly increased oil production and lowered prices in order to push Moscow to make concessions. So far, unsuccessfully. Saudi Arabia reported last Friday that no negotiations were underway with Russia.
Deputy Energy Minister of the Russian Federation Pavel Sorokin said that although the oil price of $ 25 is not encouraging, it is not a disaster for domestic producers. “Market hopes for an agreement have faded,” said Vivek Dhar, commodity expert at Commonwealth Bank of Australia.
Russia’s resistance is based on the continuation of the struggle for power. The Russian leadership seems to be still interested in a common position with Saudi Arabia. Joint actions are necessary to solve problems, as the head of the Russian state fund Kirill Dmitriev said, and they are possible within the framework of the OPEC + association, which includes, in addition to OPEC countries, other manufacturers, including Russia.
The head of the Russian oil concern Rosneft, Igor Sechin, on the contrary, openly stated that the reduction in production only guaranteed the survival of the American shale.
This leaves the door open, but also provokes speculation about how the new order might look. According to one version, the United States together with Saudi Arabia wants to reach an agreement by which the country will leave OPEC. A group of six senators addressed in a letter to Secretary of State Mike Pompeo: Saudi Arabia and Russia threaten US dominance in the energy market and are waging an economic war against the United States.
Their demand: Saudi Arabia must withdraw from OPEC and enter into a strategic partnership with the United States or “take on the consequences.” These include duties, trade restrictions, sanctions and many other measures, say senators led by John Hoeven and Lisa Murkowski. Two other senators from oil-producing states on Friday introduced a bill to withdraw US troops from Saudi Arabia.
America is under pressure. Even in view of the high oil prices at that time, the United States developed the shale industry. Thus, Washington influenced prices, and now they have fallen to a level at which American manufacturers can hardly keep competition.
Meanwhile, the US government is obviously trying to gain time. Recently, the White House said it would intervene at the appropriate time. An alliance with Saudi Arabia is one of many ideas that American politics are now considering, Energy Secretary Dan Brouillette told Bloomberg.
Nowadays, everything is hinting at a lengthy price war. Swissquote lead analyst Ipek Ozkardeskaya believes Saudi Arabia has advantages over Russia. Arabs are the cheapest producers on the international market, oil production will gradually become unprofitable for many countries. However, according to one delegate, OPEC member countries have not yet supported the call of the presiding Algeria to start consultations. Resistance comes, of course, from Saudi Arabia.
The market situation is rather complicated, at least while the positions of Russia and the USA are in conflict. Like Donald Trump, Russian President Vladimir Putin is also silent about oil.
But countries that are primarily consumers of oil are in the black from conflict. In Germany, the price of diesel fuel at gas stations fell from 1.33 euros at the beginning of the year to an average of 1.116 euros – by 16%. Since much more than half of the price of fuel is made up of other expenses, such as transportation, storage, and primarily taxes, the price can no longer fall. A halving of the cost of purchasing a product compared to February figures may lead to a reduction in the price of a liter of fuel at gas stations by only 15%.
The fact that the price of fuel oil has even increased by 10% since the beginning of March was the result of significantly increased demand. In March 2020, depending on certain sales channels, three to five times more fuel oil was ordered than in March 2019, the website Heizoel24.de claims. However, the situation with the sale of fuel oil is as tense as the situation in supermarkets. Along with increased security requirements (the use of protective masks and the constant disinfection of cashless payment terminals), orders are extremely high.
High demand supports fuel oil prices
The crowd in fuel terminals will entail an increase in loading time by several hours. Accordingly, the time for transporting fuel from remote terminals will increase. If at the same time the number of sick people grows, there will be a truly emergency situation. Customers with sufficient fuel reserves for heating water in the summer will have to think about whether it would be easier and cheaper to order fuel oil in June or July.
Moreover, the extremely high demand is perhaps caused not only by the price, which now, despite everything, is about 20% lower than at the beginning of the year. The price, of course, cannot be called unusually low. In 2017, it was the same in the same period, and in 2016 amounted to only 46 euros. In the 2000s (with the exception of 2008), the price was even lower even regularly.
And even if Russia and Saudi Arabia agree, a significant increase in oil prices may not occur. Any alliance is likely to be fragile. In addition, the situation depends on demand, which in turn will be affected by the consequences of the coronavirus pandemic.
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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.
