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On Reflection | Never mind punishing the US, Russia and Saudi Arabia’s oil price war will hurt all producers
- Moscow’s refusal to abide with Opec’s proposal to cut oil production and Riyadh’s decision to discount prices caused a rout in oil prices this week
- The intention seemed to be to punish US shale producers, but a price war on top of the coronavirus outbreak will affect all sides
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The current oil price war unfolded with startling speed once the Opec+ talks broke down last week. The trigger was Russia’s refusal to abide by an essentially Saudi-led proposal for Opec to cut crude oil production by 1.5 million barrels per day (b/d). Non-members of the organisation, of which Russia is the largest producer by far, would collectively have contributed 0.5 million b/d to this total.
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A day after the Russian refusal, Saudi Aramco announced monthly Official Selling Prices (OSPs) of all crude oil grades sold in all regions for April at “crazy” discounts and signalled its intention to increase crude oil exports.
To all intents and purposes, this reflected an all-out Saudi strategy to drive up its own volumes and compete with Russian oil in its own European backyard, as well as in Asia.
This set the stage for the rout in oil prices on Monday, the biggest daily fall since the first Gulf war in January 1991. By the end of their respective trading hours on Monday, global crude oil benchmarks Brent and WTI fell by about 25 per cent, to US$34.36 and US$31.13 per barrel, respectively.
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But why did President Vladimir Putin – the ultimate arbiter of Russian oil and gas policy – say “nyet” to the Opec proposal? After all, Russia had cooperated with it to curb production and support prices since late 2016, with the Saudis shouldering the heaviest burden in cutting back on volume. Why risk losing the diplomatic influence brought by a close alliance on oil matters with Saudi Arabia, a major United States ally in the Middle East?
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