By Sonny Atumah
It is the sign of the time as the global economy falters again. What appeared as a three-year-old marriage between OPEC and its ally, OPEC+, to support oil prices and erase the glut on the market headed for dissolution because of perceived irreconcilable differences between partners turned opponents. Last week, OPEC recommended additional production cuts of 1.5 million barrels per day, bpd starting in April and extending until the end of the year. However, OPEC-ally Russia rejected the additional production cuts to shore up prices, with its energy minister, Alexander Novak, saying that from April the country’s oil producers will be pumping oil as usual, without compliance to any OPEC+ quotas. Saudi Arabia in a counter said it was cutting the prices for its oil and planning a production increase, to supply 12.3 million bpd in April, well above its current production levels of 9.7 million bpd, Saudi Aramco CEO Amin Nasser said on Tuesday. Has Russia become the bump in the road, as it is not willing to budge? Russia is the world’s second-biggest oil exporter after Saudi Arabia. Russia’s point of view is that the OPEC+ agreement has become meaningless.
Russians explained 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 to help its production efficiency. The tension is escalating and developing into an all-out war between gladiators, OPEC represented by Saudi Arabia and OPEC+ personified by Russia. It may be the Armageddon, a time of catastrophic conflict for crude oil-producing nations if allowed to become a festering sore. Saudi energy minister Prince Abdulaziz bin Salman did not sound interested in meeting with Russia anytime soon.
He could not see the wisdom for holding meetings in May-June when necessary action was required in this crisis period of coronavirus. The disagreement between Russia and Saudi Arabia last week sent crude oil prices into crash-dive. International benchmark Brent crude traded at US$34.24 on Monday night, down by 24.36 per cent, while the United States West Texas Intermediate (WTI) stood at US$30.86, approximately 25.24 per cent lower. Both benchmarks dropped to their lowest levels since February 2016 and recorded their biggest one-day percentage declines since January 1991, at the outset of the first Gulf War. Oil prices traded up on Wednesday, with WTI at US$32.94, and Brent at US$35.71 after Monday’s massive price slump when Saudi Arabia waged a full-on oil price war.
There are unconfirmed 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. The Saudis say their after-tax breakeven costs for producing fields were below US$10 per barrel, compared with just over US$20 per barrel for the UAE, more than US$40 per barrel for Russia, and almost US$50 per barrel for Nigeria. 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. OPEC+ appears to be Saudi Arabia and Russia. Of the members subject to supply curbs, just four Kuwait, Russia, Saudi Arabia and the United Arab Emirates account for 70 per cent of the oil freeze. Others as disciples gaze as grass widows whose husbands would be away for prolonged periods. Saudi Arabia has plans to increase crude shipments to Asia, selling at discounted rates as part of its oil war strategy. The renewed oil price slump has hit countries revenues. Crude oil guarantees foreign reserves for transactions by oil-dependent nations. This battle will impose intense hardship in many oil-producing countries, with political implications that are difficult to predict.
However, an analyst says that apart from China, the epicentre of COVID-19, the price war is a tripartite one. The picture is that of an ambitious spender in Saudi Arabia with a reserve in a sovereign wealth fund, pumping at will be 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 for dividends and a heavy debt burden. For now, the United States shale producers appear to be wringing their hands and may become the first victim of the price war. A number of shale companies announced budget cuts at the start of the week. A decline in US shale oil production of 1-2million bpd from the current total US oil production of 13.1million bpd is the expectation of Russia. Russia may have decided that the time is now to pull away from the rug from under the feet of the shale oil producers. Many American oil companies could face bankruptcy and dividend payments challenges if the price pressure goes on for long. That may signal a layoff notice period for American workers. That appears to the Russian target. A last-minute deal between Russia and OPEC before the expiry of the current cuts at the end of March 2020 is very unlikely, though Mexico is mediating.