Saudi-Russian oil fight melting markets

A clash of the oil titans – Saudi Arabia and Russia – is sending shock waves through energy markets, with wide-ranging implications for consumers and oil companies, including those in the No. 1 producing country, the United States.

In the short term, oil prices are plunging in a way not seen since the days of the 1991 Gulf War. The price of US crude fell as much as 34 per cent to US$27.34 a barrel, a stunning drop for one day. By early morning in New York, it was down 20 per cent at US$33.16 a barrel, causing massive losses for shares in energy companies.

In the United States, the S&P 500 plunged as much as 7.4 per cent in the first few minutes of trading, and losses were so sharp that trading was temporarily halted. Stocks trimmed their losses following the halt. At early afternoon, the S&P trimmed losses to 6.9 per cent, the Dow Jones Industrial Average was down 1,872 points or 7.2 per cent. The Nasdaq gave up 6.2 per cent.

The decline in oil followed Russia’s refusal last week to join the OPEC oil cartel in proposed production cuts aimed at supporting prices. Thwarted in its search for cuts, Saudi Arabia, the leading OPEC member, sharply changed course by cutting prices and signalling it will ramp up production.

Prices were already falling before the stand-off, because of the coronavirus, which reduced travel and transport – the economic slowdown from the virus saps demand for fuel particularly hard. The international Brent benchmark had fallen from US$69 at the start of the year to around US$50.

Then came last week’s meeting between OPEC and non-member countries. On the agenda: a production cut of 1.5 million barrels a day, or about 1.5 per cent of global production. Saudi Arabia, the world’s No. 2 oil producer, wanted No. 3 Russia and other non-members of OPEC to take 500,000 barrels per day of the cuts.

Since 2016, the Saudis and the Russians have worked together on production issues. But this time the Russians balked. They refused to join new cuts, or even to extend previous production cuts that were due to expire at the end of March. And the Saudis hit back, telling customers that they were going to ramp up production and slash prices for Asian customers.

“Saudi Arabia has, de facto launched a price war against Russia, promising to sell its oil at a discount in order to maximise its oil revenues,” say analysts at Unicredit Bank. “It appears Saudi Arabia wants to cement its position as the world’s top oil exporter and to persuade Moscow to return to the negotiating table.”

Russia may have seen no point in cutting production only to lose market share as US shale producers in Texas and New Mexico take up the slack. Analysts say Saudi Arabia may be underestimating Russia’s ability to weather low prices. Both countries are heavily dependent on oil revenues for their state budgets. But Russia says it can balance its budget at US$42.40 for its own benchmark crude. Saudi Arabia, on the other hand needs US$83.60, according to the International Monetary Fund. What Saudi Arabia has done is to send prices so low that both will feel a serious crunch.

And Russia may have a longer-term target: the US oil industry.

“The Russians are doing this out of long-term strategic considerations,” said Tom Adshead, research director for the Macro-Advisory consulting firm in Moscow. “Their view is that by doing this they can … take a lot of US capacity offline and thereby remove US producers as a source of competition. The other thing on their mind is if they cut, then that will also primarily benefit US producers.”

Stephen Innes, chief market strategist at financial services firm AxiCorp, says Russian President Vladimir Putin may also have decided to hit back at the US industry after Washington placed sanctions on Russian state oil company Rosneft for marketing Venezuela’s oil.

AP