The Oil Price Wars in the Light of Coronavirus

With the outbreak of coronavirus, the global oil market equations have become more complicated. This, coupled with the decrease in demand that has resulted from the decline of the global economy, has led to a surplus in the global oil supply, resulting, unfortunately, in fierce competition for oil market share and a price war between Russia and Saudi Arabia, adding to the already-critical situation in the global market.

The only way to exit from this crisis is to enhance international cooperation in order to establish a balance in oil markets and ending the on-going oil price war between Russia and Saudi Arabia through a return to the negotiating table in the context of OPEC Plus.

The outbreak of the virus is a turning point, exacerbating global economic stagnation which started initially with the trade war between the US and China. The main focus of this trade war was based on oil demand. In its monthly oil market report, published on February 12, 2010, the OPEC Secretariat announced that the global market demand for oil had posted the equivalent of 0.91 percent growth and had reached 99.74 million barrels per day, on average. However, the Organisation reduced its market demand forecasts in 2020, pointing to growth of oil demand of only 0.23 million barrel per day, stressing also that the market demand is likely to reach 100.73 million barrels per day in 2020.

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It is likely that OPEC would again decrease its market demand forecasts in its March report. Concurrently, International Energy Agency head Fatih Birol took a more pragmatic view in light of the coronavirus problem. Analysing the demand environment, he said “With 3 billion people in lockdown globally, oil requirements could drop by 20%”, as he called on major producers such as Saudi Arabia to help to stabilise oil markets.

After the breakdown of the recent negotiations between OPEC and non-OPEC countries on the “deal” to reduce oil production in Vienna, Saudi Arabia announced that it intended to increase its oil production to 12 million barrels per day. Russia also stressed that it will increase its production: to 500,000 barrels per day, beginning from April. Some Saudi allies in the Persian Gulf region such as the United Arab Emirates have followed the Saudi policy, announcing their plans to increase production.

The collapse of the OPEC Plus “deal” was enough to prompt the fierce decrease in global oil prices. However, the situation became more critical when Russia and Saudi Arabia started to reduce their diverse crude oil prices, entering a fierce competition for market share, especially with respect to Asia. As a result, the price fell below 30 dollar per barrel, hitting historic lows.

In such circumstances, any war on oil prices would be catastrophic for the global market. Unlike the usual set-up in the past where low prices caused increased demand and buying, repeating the cycle of increased prices resulting from economic growth, it would be difficult this time to find any demand for even a 25 dollar or less barrel price due to the spread of coronavirus at the world level and the slowing down of economic activity, unless some countries plan to add to their strategic oil reserves, which has its own problems.

Interestingly enough, the current price competition amid circumstances reflecting the mutual crisis in oil supply and demand will damage both the Russian and Saudi economies. According to Reuters, Finance Minister Anton Siluanov told the upper house of Russia’s parliament that Russia’s budget deficit could reach 0.9% of gross domestic product (GDP) in 2020 at current oil prices. The country’s economy has been hit by a slump in global oil prices and the spread of the coronavirus, with the minister saying the latter had had the bigger effect as it complicated transportation, tourism and trade. Russia previously expected a 2020 budget surplus of 0.8% of GDP, but budget revenues from oil and gas at current prices are set to decline by about 2 trillion roubles ($27.7 billion) compared with previous estimates.

Similarly, economists expect Saudi Arabia’s budget deficit to climb from 4.7% of GDP in 2019 to more than 10 percent this year. In December, the government projected a deficit of about 6.5% for 2020. The International Monetary Fund has said Riyadh needs oil to be $80 a barrel to balance its 2020 budget, which implies a deficit of 187 billion riyals ($50 billion). “Saudi Arabia needs an oil price of about $85 per barrel to balance the government’s budget deficit, but only $50 per barrel to balance the current account,” Capital Economics said in a research note on Tuesday. “Both will be in deficit at the current oil price, but the budget deficit will be much larger, at 15% of GDP.”

The decrease in oil price will also be a big blow to unconventional crude oil production such as American shale oil. The US shale oil industry was able to manage its profitability by reducing the cost of production from 65 dollars to 46, after being pressured by the Saudis’ low price oil supply in 2015. Yet, with the oil price being below 30 dollars at present, this industry will also face serious challenges.

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Another notable point is the situations affecting Russia, Iran and Venezuela, the three major players in the oil markets affected by unilateral sanctions on their oil industries. Regarding Russia, at present only part of its oil industry faces the US sanctions. While given the current circumstances, it doesn’t seem that the US plans to impose further new sanctions against the country’s oil industry, the current sanctions have retained their negative impact on Russia’s plans for developing its oil and gas industries for the time being amid an on-going economic decline. Therefore, Russia’s best solution, especially amid the coronavirus era and its short and long-term effects on global economy, is to return to OPEC Plus negotiations table and encourage other producers to do so, thereby striving to control the oil price through the reduction of supply in markets, thus balancing global “supply and demand”. One should not forget that we are getting closer to the heat season, during which the demand for oil seasonally decreases.

Regarding Iran and Venezuela, their situations are rather different and more harmful, because they need the incomes of oil exports for improving their public welfare and health in countering coronavirus. Therefore, the precarious consequences of the US sanctions will not be only limited to economic losses, rather endangering the life of people, an evident example of breaching human rights. The low price will also negatively impact these countries’ oil affiliated sections such as refining and petrochemical industries.

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