The collapse of a Saudi-Russia deal has rattled markets – Oil price are crashing

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  The collapse of a Saudi-Russia deal has rattled markets – Oil price are crashing

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Read more on - Polity | Economy | Schemes | S&T | Environment

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1. What’s the matter - Oil prices saw their biggest single-day crash in almost 30 years on March 9. The price of a barrel of Brent crude closed down 24% at $34.36 after a price war was initiated between Saudi Arabia and Russia, two of the world’s largest oil producers. It recovered slightly on March 10, but crashed again. Brent crude price was hovering around $33 a barrel. Prices crashed by almost 50% this year, from $66 a barrel on December 31, 2019 to the current levels, primarily driven by lack of demand.
2. OPEC-Plus alliance - After 2014 “glut” diplomacy which brought down prices below $30 a barrel, Saudi Arabia and Russia came together to cut output and steady prices. Known as the “OPEC Plus” arrangement (Russia is not a member of the Organisation of Petroleum Exporting Countries, or OPEC), this alliance kept production lower and pumped up the prices. The OPEC-Plus cooperation collapsed last week after Russia rejected a Saudi request to effect more cuts in output given the fall in demand owing to the economic impact of the coronavirus outbreak. Saudi Arabia’s oil giant Aramco announced that it would increase output from 9.7 million barrels a day now to 12.3 million barrels in April. Aramco also offered a discount to its variety of crude, targeting Russian markets in Asia and Europe. 
3. What do Saudis want? -  The plan is to flood the markets with Saudi oil and depress the prices, which would hurt all oil exporters. Riyadh may have multiple targets. One is to exert pressure on Russia and make it come back to the negotiation table. Second, if the Russians do not blink, the plan is to capture market share from Russia with discounts. Third, bleed the U.S. shale oil producers who could not sustain production at depressed prices. But there is question mark on whether Saudi Arabia could sustain the price war for a longer term. Roughly 90% of Saudi budget revenues are coming from the petroleum sector. The Kingdom wants prices to be over $60 a barrel to balance its budget. Prolonged depressed prices will leave a bigger hole in the Saudi budget, complicating further the Crown Price’s economic reform and diversification agenda.
4. What’s Putin’s plan? - Russian companies also want to open the taps and gain more market share. There’s a convergence of interests between Saudi Arabia and Russia in hurting the U.S. shale oil companies, which are flooding markets with shale oil and challenging the supremacy of traditional oil producers in determining the prices (U.S. output was more than 12 million barrels a day in Feb.). Russia is in a relatively stronger economic position than Saudi Arabia. Oil now accounts for less than a third of its budget revenue. The country has also built a war chest of $435 billion in foreign exchange reserves.

Read more on - Polity | Economy | Schemes | S&T | Environment

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