Will Saudi-Russia deal to end the oil price war be enough as coronavirus-battered global economy grinds to a halt?

When the oil price war began, no one had accounted for the economic damage that would be caused by Covid-19, or how demand for oil would evaporate

The reality is that oil under US$30 per barrel is not sustainable for either country when oil revenue is a crucial source of income to fund fiscal spending

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A worker checks the valve of an oil pipe at the Lukoil-owned Imilorskoye oilfield, outside the west Siberian city of Kogalym, Russia, in January 2016. Photo: Reuters

Published: 2:00pm, 10 Apr 2020Updated: 10:24pm, 10 Apr 2020

It has been understandably overshadowed by the coronavirus crisis, but the oil market has had a few wildly dramatic weeks. There have been more plot twists than in a soap opera, but with real-world consequences. As a result of these machinations, the oil market now faces a perfect storm of a sudden collapse in global demand and rising supply.

The month-long all-out price war caused prices to plummet to levels not seen since the great financial crisis. But this is not the first battle in the long war to control the oil market. The ultimate conclusion is all but assured to be a truce – Russia and Saudi Arabia have now agreed in principle to temporary concessions on production and a subsequent slow rebalancing of supply and demand to lift prices.

Opec’s dominance in the global oil market has waned over the years, especially as technology has advanced and the United States has engineered a revolution in fracking and shale oil production. The US is now the world’s largest oil producer, with around 12.5 million barrels per day. Russia produces around 11 million barrels per day and Saudi Arabia 10 million.

Until recently, the Organisation of the Petroleum Exporting Countries had fragile control of output by global producers, thus curbing production and keeping prices sustainable. That tenuous agreement fell apart in March as countries increased production to grab market share and squeeze out higher-cost producers, such as the US shale oil industry. So far, active oil rigs in the US have taken a hit, but there has been no instant impact on production.

This is hardly the first battle in the oil war. In 2014, Saudi Arabia blocked calls for oil production cuts from smaller members of Opec, and oil prices that were already in free fall plunged further. The price of a barrel eventually bottomed at about US$30 in February 2016.

Then, as now, the rig count in the US declined as the price of oil fell but output cuts didn’t materialise for a number of months. This time, the drop in prices has been more severe, so US production may fall sooner. More importantly, the US is running out of space to store all its oil.