US, WASHINGTON (ORDO NEWS) — The price war between Saudi Arabia and OPEC, on the one hand, and Russia, on the other, is entering a new phase of escalation due to the fact that each side adheres to its own position. Many black gold producers are worried that oil prices will show negative values if the price war continues, which unsuccessfully coincides with the coronavirus pandemic that has paralyzed the global economy, including the oil market.
It is expected that in light of the current situation, as well as in connection with a sharp excess of supply over demand in the oil market, refineries, pipelines and oil tankers will reach their peak capacity, which has not been observed since 1998. This means that the extracted oil will not be able to get into the oil storage facilities or reach its destinations. This was reported by the investment company Goldman Sachs.
Thus, the oil crisis threatens the world market and puts oil producers in a difficult position. US President Donald Trump tried to intervene to reduce tensions between the two sides. He expressed confidence that Russia and Saudi Arabia will work out some kind of decision on oil prices in the next few days, because this situation has a bad effect on both countries.
The US Department of Energy called on Riyadh and Moscow to work together to calm the oil market in these turbulent times. This appeal coincided with the US President conducting intensive negotiations with the leaders of the two countries in order to develop a common formula that will help to avoid a catastrophic scenario where everyone will be the loser. Will Trump succeed?
The battle is lost in advance
Recall that on March 9, 2020, Saudi Arabia announced an increase in oil production and a reduction in prices of $ 6-8 per barrel in response to Moscow’s refusal to extend the OPEC + agreement to reduce production. In the past period, both sides have been negotiating to reduce production and stabilize prices.
Unfortunately, these negotiations did not lead to any positive result. Russia refused to reduce production, pointing out that stable oil prices help US shale oil companies to develop, so it will continue to maintain a high level of production. Meanwhile, Saudi Arabia insisted on keeping the price of a barrel at around $ 50 in the name of its own interests.
The rivalry between Russia and Saudi Arabia led to a war where all the obviously losers. According to experts, the global situation in the world can lead to a real crisis, as it was in 2008, and it will take a year or two to overcome all the consequences.
Jefferies International Bank spokesman Jason Gummel believes that if Saudi Arabia maintains a high level of production, then the minimum oil price in the short term will be zero. Meanwhile, Björnar Thonhaugen, head of Restad Energy’s oil market research, said: “The oil market is facing a sharp drop in demand due to the coronavirus pandemic. In the second quarter, supply in the oil market will grow 4-5 times compared with demand due to excess oil coming from OPEC producing countries. ”
Goldman Sachs analysts, who predicted March 18 that global oil demand would fall by 1.1 million barrels per day, lowered their forecasts for the second quarter of 2020, suggesting that the cost of a barrel of Brent crude oil would not exceed $ 20. This means that the oil market is on the verge of a catastrophe that will certainly erupt if the price war continues.
The oil crisis affected not only Saudi Arabia and Russia, but also affected American companies engaged in the production of shale oil. They suffered huge losses due to lower oil demand due to coronavirus and the Russian-Saudi price war. The current situation has led to the fact that the shale industry was on the verge of bankruptcy. To date, the indicators for the first quarter of 2020 are recognized as the worst in the entire history of the industry.
All of the above forced the Americans to intervene to prevent the situation from worsening. A spokeswoman for the Department of Energy, Shailene Hines, said: “The sharp increase in oil production in the current situation of declining global demand is disappointing and is not in the interest of maintaining stability in global oil markets.” She added that US Secretary of Energy Dan Bruylett is in talks with colleagues from major oil producing countries to try to stabilize markets.
The Kremlin’s press service announced a telephone conversation between Russian President Vladimir Putin and US President Donald Trump, during which leaders discussed the situation on the world oil market and agreed to hold bilateral consultations at the level of energy ministers. In addition, a few days ago, the American leader announced that he would try to resolve the oil crisis, which negatively affects the state of the US stock market. At the same time, some members of the US Congress accused Riyadh of committing acts that are detrimental to the US economy and are not consistent with the spirit of partnership.
On Wednesday, April 1, Trump said he was ready, if necessary, to join the negotiations of Saudi Arabia and Russia to end the oil price war and said that he had already spoken with the Crown Prince of Saudi Arabia and the Russian President, noting that the talks were positive vein.
At the same time, according to Trump, if Russia and Saudi Arabia can not reach an agreement, he has his own action plan, which he would prefer not to resort to.
It is worth noting that earlier the US president accused Moscow and Riyadh of “losing their minds” because of oil prices. The American leader said: “We do not want us to have a dead industry. This is a bad day for them, bad for everyone. This is a battle between Saudi Arabia and Russia regarding how many barrels to produce. And they both went crazy.”
Will oil diplomacy succeed?
According to Bloomberg, Trump is making efforts to reach a ceasefire to end the price war, but Riyadh is resisting. It is noted that the American leader has already talked with Muhammad ibn Salman and Vladimir Putin, while Moscow has not been in contact with Saudi officials from the very beginning of the crisis.
According to an informed source familiar with the situation, Saudi Arabia increased production to more than 12 million barrels per day. He confirmed that Riyadh would not back down from its decision to flood the global market if oil exporting countries, including the United States, did not agree to reduce production.
For its part, Moscow said it planned to increase production, but did not put forward any suggestions on how to end tensions with its former OPEC + ally. According to Bloomberg, Trump’s decision to conduct oil diplomacy was caused by the disastrous consequences of the collapse in oil prices, which negatively affected the shale oil industry.
At the moment, the main question is how successful the efforts of the American leader or OPEC + in rescuing the oil market will be. A senior Russian politician said that at the moment Moscow is not conducting a dialogue with Saudi Arabia and believes that it is not economically feasible for Russia to increase oil production in the current situation. It should be noted that there are no signs of readiness to consider the issue of reducing Russian production.
Bloomberg attributes the fall in oil prices to Moscow’s refusal of the OPEC + deal to reduce oil production. Kremlin spokesman Dmitry Peskov said: “Russia has traditionally welcomed dialogue and cooperation to stabilize energy markets,” while noting that President Putin does not plan telephone conversations with the Crown Prince of Saudi Arabia.
Chris Bake, Executive Director of Vitol Consulting, said the global market needs 100 million barrels per day, but oil demand will decrease by 30 million barrels in April.
However, on the other hand, the Russian official said that it is not logical for oil-producing countries to increase production rates in the current situation. Meanwhile, Russian Energy Minister Alexander Novak said that in the short term, Russia could increase oil production by 200-300 thousand barrels per day, and in the future – up to 500 thousand barrels per day. By the way, Russian plans can not be compared with the plan of Saudi Arabia to increase oil production by 2 million barrels per day.
The global oil market froze in anticipation of results from US efforts to reduce tensions between Moscow and Riyadh. Many hope that the joint work of the US and Russia to resolve the oil crisis can lead to a positive result, provided that Saudi Arabia responds to the American initiative. On the other hand, if Riyadh follows the lead of the United States, then it may lose the palm in the world oil industry.
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