How Russia, Saudi Falling Out Prompted This Week's Oil Crash

By Henry Srebrnik, [Saint John, NB] Telegraph-Journal 

A coronavirus-fueled oil price war has sent crude prices plummeting. Prices tumbled into the $30s, the biggest drop since the 1991 Gulf War, as Saudi Arabia slashed prices in a battle for market share after Russia rejected calls from the Organization of Petroleum Exporting Countries (OPEC) for deep output cuts.

It was widely reported that the group had hoped to come to an agreement to reduce oil production by 1.5 million barrels per day.

At a meeting of OPEC on March 6, Saudi Arabia headed a push to reduce output -- but non-member and major oil producer Russia refused, looking to preserve its own market share. 

Angered by the move, Riyadh responded a day later by driving through the biggest cuts to Saudi prices in 20 years, while raising output. The cut added further uncertainly to global markets already roiled by the coronavirus.

The Saudis had been pushing for the cut in output to prop up prices, but did a reversal when Russia balked and decided, instead, to flood the market with hundreds of thousands of additional barrels per day at a steep discount.

The Saudi price drop “might be a shot across the bow to bring producers, notably Russia, back to the negotiation table,” according to Harry Tchilinguirian, a commodities analyst at BNP Paribas.

“A combination of a policy aimed at market share and a COVID-19-induced negative demand shock might see oil prices move lower still,” he warned.

“Cheap oil is one thing. Super cheap oil is another,” John Kilduff of Again Capital told the Washington Post.

“The stock market is looking at the oil price plunge as a canary in the coal mine of a disinflationary one-two punch, driven partly by cratering demand for transportation fuels and a wanton price war among the major oil producers” that will result in big losses for U.S. and Canadian producers.

Saudi Arabia cut its price for April delivery by $4-6 a barrel to Asia and $7 to the United States. At the same time, the kingdom said it would hike its own oil production to more than 12 million barrels per day from April on. In doing so, Saudi Arabia has launched a new price war for market share.

But the problem they face as they enter into a price war is that Russia is better positioned to sustain a stretch of cheap oil.

Moscow indicated it could withstand oil prices of $25-$30 per barrel for 6-10 years. Riyadh, meanwhile, can afford oil at $30 a barrel, but would have to sell more crude to soften the hit to its revenue, according to Reuters sources familiar with the matter.

The Russians had previously signaled their resistance to additional production cuts in February when OPEC floated the idea.

It had been widely expected they would go along with the plan, because the alternative seemed much worse. So what changed?

From Russia’s point of view, all this strategy was doing was propping up U.S. oil producers at the expense of everyone else. The only way to counter this work would be for OPEC and its partners to keep cutting until U.S. shale oil production began to decline.

“The Russians see this as an opportunity to break the back of the American oil industry because many sectors of the industry don’t have access to capital and have a lot of debt,” said Peter Tertzakian, Calgary-based executive director of ARC Energy Research Institute.

Robert Rapier, a chemical engineer in the energy industry, believes Russia will probably eventually decide that the pain is too great, and come back to the table. In the interim, many American shale oil producers may be forced into bankruptcy.

The International Energy Agency (IEA) warned that the world is set for its first annual decline in oil consumption in more than a decade.

A production-cut agreement could still happen. An advisory-level OPEC meeting is scheduled for later this month, and the Russians have said they are open to further talks.

As the battle plays out, the collateral damage will be felt worldwide. As the world's fourth-largest oil exporter, Canada will be greatly affected.

And no matter who wins this game of chicken between Russia and the Saudis, the American shale gas industry will be the loser.