The coronavirus pandemic has brought massive shocks across the stock market. Adding fuel to the fire, an oil war has been waged between Russia and Saudi Arabia. In an attempt to curb the growing economic fallout, a deal was sealed.
After more than a week of discussions, the three biggest oil-producers—the United States, Russia, and Saudi Arabia — sealed last Sunday what is now considered the largest production cut ever negotiated by a cartel, The New York Times reports.
With an on-going pandemic crisis and the prospect of re-election, the United States’ Trump was compelled to step in the oil war between Russia and Saudi Arabia which began last month.
The deal made by OPEC Plus — which includes the Organization of the Petroleum Exporting Countries (OPEC), Russia, and other oil producers — will shrink production in the upcoming months of May and June by about 9.7 million barrels each day.
“This is at least a temporary relief for the energy industry and for the global economy,” Per Magnus Nysveen, head of analysis for Rystad Energy told New York Times.
Why an oil war now, of all times?
Three years ago, Russia began coordinating its production with other members of the OPEC Plus. In a meeting last March in Vienna, this deal fell through.
This is due to the massive production cuts proposed by Saudi Arabia, which will cut the cartel’s production by 1,000,000 barrels per day in light of the lowered demand for oil due to the coronavirus pandemic. If the proposal was approved, Russia will be shouldering 500,000 barrels each of this cut.
The production cut was deemed necessary to keep the oil prices up in the market so that revenue is maintained among member countries, especially those whose incomes are largely driven by fuel exports.
What would prod Russia to go against this proposal? Some speculate that keeping the prices low will inflict damages on the shale industry of the US, which placed the country in the top position of the crude market in the previous years. Others say that this could be a way to gain a foothold in the global oil demand.
This might have worked, except Saudi Arabia did not take the move too well, responding through the imposition of massive oil price cuts which of course would veer away demand from Russia. Saudi promised to flood the market with more oil, bringing the prices to as low as US$ 20 per barrel, a price which is less than half of the starting prices of oil this 2020.
And so, the oil war began.
The oil price war was meant to end soon after that. With both countries insisting that they can withstand the lowered oil prices, both their economies suffered greatly. Had they continued, this economic fallout could have turned into a massive political unrest.
“The Russians miscalculated how sharp the Saudi response would be and they might have been taken aback by how deep the price drop was,” Ben Cahill, a senior energy fellow at the Center for Strategic and International Studies told New York Times.
With the deal in place, it remains uncertain if the move will be sufficient to regain the losses that have been incurred so far. While the oil price war may be out of the picture, at least for now, the COVID-19 pandemic continues to plague the world.
Even if the oil war is settled, the glut in oil will remain pretty much unresolved in the midst of the pandemic. With commercial air travel and other activities put to a halt, the world’s appetite for will continue to be in the low extremes.
The oil market will definitely experience more losses in the upcoming months, which is largely dependent on how long the lockdowns will stay in place and business operations will be paralysed.
“The agreement provides the expectation of stability. But whether the markets react accordingly is a different ballgame,” Rene Ortiz, Ecuador’s energy minister and a former secretary general of OPEC, said in an interview.
There are challenges ahead that countries will have to resolve. For now, the worst case scenario is avoided, at the very least.