By Sonny Atumah
The global economy is faltering, with the oil industry out against itself and no solution in the near future. Things are indeed, falling apart, with the centre no longer holding, akin to native Umuofia, in Chinua Achebe’s African classic, Things Fall Apart. What appeared as a three-year-old marriage between Saudi Arabia and its ally, Russia, to support oil prices and erase the glut on the market headed for dissolution because of perceived irreconcilable differences of partners turned opponents. The tension between gladiators, OPEC represented by Saudi Arabia and OPEC+ personified by Russia escalated and developed into an all-out war. They began the oil price war with uncontrolled crude oil supply to gain market share. In one week, oil prices plunged by over 30 per cent, the worst since 2002. The International benchmark Brent crude went down to multi-year lows, trading at US$27.36 on Wednesday night, while the United States benchmark the West Texas Intermediate (WTI) stood at US$22.77 per barrel. The OPEC basket of 13 crudes traded at US$30.36 a barrel according to OPEC Secretariat calculations.
The COVID-19, a short-lived pandemic surfaced to aggravate the situation of oil demand growth remaining weak. It has slowed trade, transportation and other energy-intensive economic activities globally. The effect is only second to the 1918 flu pandemic that killed at least 50 million people worldwide. The biggest oil nations instead of cooperating went into a price war. OPEC de facto leader, Saudi Arabia recommended additional production cuts of 1.5 million barrels per day, bpd starting in April, which ally Russia rejected. Russia’s Energy Minister, Alexander Novak declaration that from April the country’s producers will pump oil without compliance to any OPEC+ quotas because the agreement has become meaningless stirred up the hornets’ nest. Aramco CEO Amin Nasser, in a counter, said Saudi was cutting the prices for its oil and increasing supply to 12.3 million bpd in April, well above its current production levels of 9.7 million bpd. Russia is the world’s second-biggest oil exporter after Saudi Arabia. Russians believe that by ceding ground on their markets, they would take cheaper Arab and Russian oil off the market only to clear the coast for more expensive United States shale production.
Saudi Energy Minister, Abdulaziz bin Salman is not interested in meeting with Russia in May-June, though Mexico is mediating. The fierce battle for market share is for the Saudis to squeeze any competition out of core markets in Europe and Asia by selling at discounted rates as part of its oil war strategy. Saudi Aramco has offered the Arab Light and Arab Heavy blends for between US$25 and US$28 dollar per barrel in Europe, to beat prices offered for Russia’s Ural blend to send prices even lower. Russia’s response is that it can withstand the price war for 6 to 10 years if the price range for crude is from US$25 to US$30 per barrel. The 2020 fiscal breakeven price for Russian crude is US$42.4 per barrel. It has a foreign reserve of US$500 billion, meaning it is prepared for the price war. There are reports that Saudi Arabia is simulating budgeting exercises for oil crashes to between US$12 to US$20 per barrel. It is also looking at an extreme scenario in which oil falls below US$10. Analysts say egomania, national prestige and geopoliticsovertook good judgment sense. Throwing their hats into the ring, sent crude oil prices into crash-dive.
OPEC+ appears to be Saudi Arabia and Russia. Other disciples gaze like grass widows whose husbands would be away for prolonged periods. The renewed oil price slump has hit oil-dependent countries revenues, with political implications that are difficult to predict. The whipsaw crossfire is with strong oil supply growth from large global inventory, and a demand slump inflicted by the coronavirus pandemic. It is the Armageddon, a time of catastrophic, chaotic situation that is become a festering sore for crude oil-producing nations. OPEC producers can hardly balance their budget from a global recession that is looming. However, an analyst says that apart from China, the epicentre of COVID-19, the price war is tripartite and proxy in nature. The picture is that of an ambitious spender in Saudi Arabia with a reserve in a sovereign wealth fund, pumping at will, being a low-cost producer. Russians have experienced oil price crashes, and have braced up for lower oil prices. The third leg of the tripod is the United States, which oil-producing companies, are grappling with insufficient cash.
Shale producers appear to be wringing their hands as immediate victims announcing budget cuts. A decline in US shale oil production of 1-2million bpd from the current total oil production of 13.1million bpd is the expectation of Russia to pull away from the rug from under the feet of shale oil producers that are facing bankruptcy and dividend payments challenges. That may signal a layoff notice period for American workers, which appears to the Russian target. The markets are already in panic mode with central banks stimuli to turn around sentiments of investors and traders. The United States Federal Reserve plans to inject as much as US$1.5 trillion into U.S. markets. Japan’s trade bureau said on Wednesday that crude imports into the world’s third-biggest economy in February were down 9 per cent from a year earlier. We are heading for a recession.