Here’s something you may have missed amidst the deluge of coronavirus pandemic-related updates around the world: An oil price war is on the tables.
Oil’s Not Well
Earlier this month, OPEC fell into disarray after a Saudi-backed plan to cut crude output was rejected by Russia. Following this, oil prices lost a fifth of their value. Since then, prices have plummeted to their lowest level since the 1991 Gulf War.
Riyadh has since then said it would boost production to 12.3m barrels per day (bpd), which is c. 300,000 bpd over previous maximum sustained capacity. Moscow has said it would rapidly open its own taps. The resulting oil glut, coupled with the fall in demand from China, has cause oil prices to freefall even more.
Enter Uncle Sam
The US, whose shale revolution enabled it to become the world’s largest oil producer at 13m bpd, has now said it could intervene in the price war. Government officials are reportedly mulling a diplomatic push to get Saudi Arabia to cut oil production and at the same time threaten sanctions on Russia in order to stabilise prices.
Meanwhile, the Texas Railroad Commission, an oil industry regulator, is considering curtailing crude production for the first time in decades so as to not flood the oil markets.
In a Fix
Admittedly, President Donald Trump is unsure about the way forward. Oil prices are down 60% year to date in the US, and this is invariably hurting oil companies. But Trump says consumers are benefiting from low gasoline prices. Thus, he is “a little torn” over plans to intervene, saying such actions would be taken, if at all, at an “appropriate time”.
Nonetheless, news of Washington’s possible intervention calmed oil markets slightly, and oil prices recovered today. They were also helped by the US government’s plan to buy up to 30m bpd for its emergency stockpile by the end of June.
How Will This End?
The Saudi-Russian standoff might end up hurting Saudi Arabia more than Russia. Consider this: Russia’s budget breakeven price is $40 per barrel; Saudi’s is $84. Russia’s capacity is 11m bpd while Saudi’s is 8m bpd.
An oil price war between the two petrostates would drive prices down and Saudi, with its oil-reliant economy, might be greatly disadvantaged by this. If oil hits $25, Russia could sustain from a budget and foreign asset reserves perspective for up to 10 years while Saudi might be able to manage two years at most.
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