US, WASHINGTON (ORDO NEWS) — In early March, a meeting of OPEC transaction partners was held, which discussed the state of oil markets and the extension of the agreement to reduce oil production, in force since 2016. According to press reports, OPEC intended to conclude a new deal to reduce oil production by 1.5 million barrels per day.
The IHS research company Markit Crude Oil Market reported that global oil demand in the first quarter of 2020 fell by 3.8 million barrels per day compared to last year. Experts have warned that the world will see the largest drop in oil demand in history.
This time, one of the main partners of OPEC – Russia – refused additional reductions in production. Incidentally, the Russian side reluctantly agreed to cut production in February, when OPEC first proposed to cut oil production. After Russia refused the agreement, oil prices collapsed by about 10%. The Russians were previously expected to approve the agreement because the alternative is much worse. What were they thinking?
Let’s get back to 2014, when OPEC first declared war on American shale oil producers. Oil prices began to fall as shale oil production continued to rise. Then OPEC decided that it needed to protect its market share. This was followed by a price war, which led to a drop in oil prices to $ 20 per barrel. At that time, OPEC argued that such a decision would cost member countries a trillion dollars or more, but it was worth it.
This strategy forced some shale oil producers to declare bankruptcy, but most of them coped with the crisis, which OPEC did not expect. Thus, two years later, member countries of the organization returned to a strategy to reduce production to maintain oil prices at a certain level.
Unfortunately, the drawback of this strategy is that while reducing production helps maintain oil prices, it is in the hands of American shale oil producers. Thus, US shale oil production continues to increase. This situation has led OPEC member countries to cut production again and again, as shale oil production continues to grow. Many OPEC member countries consider this approach unfair, but they have already tried alternative options, and the result did not suit them.
As for the Russian strategy, it consists in restraining American shale oil producers at the expense of other producers. The only option in which this strategy will work is if OPEC member countries and their partners agree to reduce production until the production of shale oil in the United States reaches a peak and begins to decline.
The Russians are confident that this will happen soon. Meanwhile, the performance of OPEC member countries fell to the lowest level in 17 years. It should be noted that Russia also needs revenues from oil exports, so the refusal to cooperate with OPEC can cost her dearly. It is likely that the Russians will sell more oil, but at a much lower price.
Unfortunately, the coronavirus pandemic exacerbated the situation. Now, instead of struggling with an increase in the production of American shale oil, the world has to deal with millions of barrels of excess oil, as demand for it falls amid an outbreak of coronavirus.
So, Russia is already revising the 2014 strategy to protect its share in the oil market. After Russia refused the agreement, Saudi Arabia announced a sharp decline in its oil prices, which has not been observed for more than 30 years. The value of shares of the oil company of Saudi Arabia Saudi Aramco against the backdrop of the breakdown of the OPEC agreement for the first time fell below the IPO.
Many analysts have repeatedly pointed out that OPEC is at a disadvantage due to shale oil production in the United States. In 2014, OPEC first tried one strategy, then another, but today Russia again forces it to return to the original version.
Last month, investment banks expected oil prices to continue to fall after Russia’s refusal to cut oil production. Now that it has become clear that it will not back down, oil-producing countries are entering a period of severe economic crisis. Oil prices collapsed. Many oil companies go bankrupt. State budgets of oil exporting countries will be depleted.
According to analysts, the end result is likely to be the same as the last time this strategy was applied. Incidentally, oil prices could fall below $ 20 per barrel. Russia may finally decide that the consequences for the country’s economy are too fatal and return to the negotiating table. Meanwhile, many shale oil producers will be forced to file for bankruptcy.
It is noted that the global oil industry is at serious risk. The share of electric cars in the market is growing from year to year. If the price war lasts for several years, which is likely, the oil industry will most likely never recover. This can really happen if we take into account the coronavirus pandemic. In a word, the result will not be long in coming, but so far the oil markets are waiting.
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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.