Saudi-Russia oil showdown jolts global market
A price war erupting between two of the world’s largest oil-producing countries has contributed to a historic oil market meltdown and put into question a strategic political and economic partnership between Saudi Arabia and Russia.
The price war is inflicting pain on several casualties — the US shale industry and shareholders of Saudi Aramco stock — and it’s early days.
Crude prices suffered their largest one-day loss in nearly 30 years on March 9, plummeting 24% as disagreement between Riyadh and Moscow over how to counter slackened demand exacerbated by the spread of the coronavirus suddenly veered into an all-out price war.
Saudi Arabia, OPEC’s largest producer, and leading independent producer Russia had led an alliance of some 24 oil-producing countries known as OPEC+ that cooperated on collective output cuts since late 2016 to boost crude prices and stabilise oil markets.
At a meeting of OPEC+ ministers March 6 in Vienna, Russia refused to accept a Saudi-led proposal enacting a further 1.5 million barrel per day (bpd) reduction from current levels that would be implemented for the remainder of 2020.
In leaving the Vienna gathering, Russian Oil Minister Alexander Novak bluntly said: “From April 1, neither we nor any OPEC or non-OPEC country is required to make output cuts.” Moscow had been facing growing pressure from its state oil firms to end constraints on their crude production.
The Russian government has been irked that the expansive US shale industry has been a large beneficiary of OPEC+ coordination to shore up oil prices without having to sacrifice production.
US independent shale firms were quick to announce budget cuts and reduced domestic drilling as the Saudi-Russian price war exploded.
Riyadh’s response to Moscow’s rejection of deeper and extended cuts was swift. State oil giant Saudi Aramco announced on March 7 its steepest cuts in 20 years to prices for its main crude exports.
The Saudi company reduced its April official pricing for its Asia-destined crude by $4-$6 a barrel and slashed pricing for its US customers by $7 a barrel. Saudi Aramco significantly slashed pricing for its crude grades to north-western Europe by $8 a barrel, seeking to undercut Russia, which places most of its Urals grade in that market.
Expressing its intent to flood oil markets, Saudi Aramco declared it would boost output from 9.7 million bpd to a record 12.3 million bpd in April and that the Saudi Oil Ministry had requested that it raise its crude production capacity to 13 million bpd.
While the kingdom realistically may not be able to boost output that quickly, it can draw from storage to assist in the higher oil flows. Moscow said it would add 300,000-500,000 bpd to its production in April. The United Arab Emirates, a staunch Saudi ally and fellow OPEC member, stated that it was elevating its oil output by 1 million bpd to more than 4 million bpd in April.
Saudi Aramco has initiated price wars in the past, notably in 1986 and 1998, but this price battle is different in that Saudi Aramco is no longer accountable to just its government. Its recent initial public offering of 1.7% of the company now makes Saudi Aramco beholden to some 5 million retail investors, the majority of whom are Saudi.