Due to the failure of the OPEC+ agreement to reduce oil production, prices for black gold fell by almost 30 percent to their lowest level since 2016. Saudi Arabia announced that from April it will sell oil at discounts of $6-7 and increase production by more than 10 million barrels per day. Some experts called this the beginning of price wars in the energy market. Following oil prices, exchange indices around the world spiralled. The situation is fuelled by the economic difficulties caused by the spread of coronavirus. Alexei Grivach, Deputy General Director of the National Energy Security Fund, discussed in an interview with valdaiclub.com what will happen next.
How will the oil market be regulated now? How likely is its re-division amid the current conditions?
The oil market is a conventional one. I think that it will remain so for the foreseeable future. It’s just that an objective situation has now arisen where it has become almost impossible to prevent a price reduction. It could be made smoother, but nothing more.
The struggle for markets is ongoing every day. Given the likely decline in demand due to the coronavirus epidemic, it will certainly worsen.
Is OPEC efficient?
OPEC has long ceased to be the key player. To influence the market without harming oneself, broader coalitions of producers are needed, as evidenced by the OPEC+ format, which has maintained the relative stability of the market over the past few years.
When it comes to price wars, what kind of response can Saudi Arabia give countries with higher production costs? Are alliances possible amid price wars?
What is a price war? Three weeks ago, oil quotes were up by $20. Therefore, Saudi Arabia’s provision of discounts to its customers is just an alignment of its marketing policy with market realities.
As for other producers, traditional investment projects have a lot of inertia; they will not reduce production due to the low price. Alternative oil producers with a much shorter investment cycle are another matter. At such prices, most manufacturers in the United States leave the operating margin area. Therefore, the cessation of production growth, and then its decline, is only a matter of time. The actions of the US monetary authorities may delay this process.
So far I do not see a price war, when someone deliberately dumps in order to oust a competitor from the market.
What steps should be taken to stabilise the hydrocarbon market?
It depends on what you meant by stabilization. Now the fall has stopped. To return to the $60-70 price corridor, you need to defeat the coronavirus and overcome its consequences, or radically reduce oil production throughout the world.
Will the current crisis become even worse than the 2008 crisis?This is a philosophical question. Now, in addition to economic and geopolitical reasons, there is an epidemic factor.