Oil price war

Crude prices plunged to record lows on 9 March as an oil price war between Saudi Arabia and Russia commenced after the latter refused on 6 March to agree to a further production cut with OPEC, which prompted Riyadh to reportedly slash its oil prices and boost production.
WTI plunged 19.3%, or $7.96, to trade at $33.37 per barrel, CNBC reported. International benchmark Brent crude slid $9.10, or 20%, to trade at $36.19 per barrel. Earlier in the session WTI dropped to $30 while Brent traded as low as $31.02.
Last week in a response to the potential effects of the coronavirus outbreak, the Organization of Petroleum Exporting Countries and OPEC’s de facto leader Saudi Arabia recommended additional production cuts of 1.5 million barrels per day starting in April and extending until the end of the year. But Russian Energy Minister Alexander Novak appears to have rejected the additional cuts at a session with Saudi Energy Minister Prince Abdulaziz bin Salman Al Saud when the oil cartel and its allies, a group so-called OPEC+, met on 6 March.
“Russia fired the first shot in an oil price war by refusing to expand the existing OPEC+ deal. Saudi Arabia moved the conflict forward with the weekend announcement that it will not only not extend the existing deal, which ends March 31st, but will open the taps and sell cheap oil,” Chris Weafer, founder of Macro-Advisory in Moscow, wrote in a note to investors on 9 March, adding that over the short-term the oil price looks set to test the January 2016 level of $29.50 per barrel.
He argued that Russia is in a much better financial position to endure an oil-price war than it used be or compared to Saudi Arabia. “That is a very big difference between now and early 2016,” Weafer said, adding that Russia’s financial reserves are $80 billion greater than Saudi’s and growing. Moreover, Saudi has been eating into its reserves to fund the budget deficit and the Crown Prince’s ambitious development plans.
After allowing the ruble to free float, Russia has a flexible currency while Saudi’s riyal is pegged to the US dollar. “It means that the ruble may dip to approximately 75 versus the dollar and the budget would breakeven at approximately $38 per barrel oil without any current spending adjustment,” Weafer wrote, adding that Saudi needs $85 per barrel oil.
“It means that Moscow is unlikely to blink first, certainly not for another 3 to 6 months. But Moscow may take the view that Saudi Arabia’s financial position will be a lot more strained before that,” he added.
Target may be the US shale producers
Weafer argued that the big target for both may be the marginal US shale producers. US oil production has more than doubled over the past ten years and its market share has increased from 9% in 2008 to over 17% last year.
Meanwhile, coronavirus has cut deep into demand. According to Weafer, the backdrop to a price war could not be much worse: the Covid-19 crisis looks set to cut at least 2 million barrels from daily demand in the first half of 2020.
Weafer argued that Russian President Vladimir Putin will not want to cut spending in the key national projects programme or to scale back his promised extra funding for social programs and to help boost household incomes.
Russia’s Finance Ministry issued a report showing it can live with $25 per barrel for months. “The Finance Ministry has issued a table showing the impact on the budget at different oil prices. This also assumes a weaker ruble exchange rate as oil falls. It shows the crunch price at $25 per barrel. Below that, for too long, and Moscow’s position would likely change,” Weafer said.
Trump blames oil price war for price hike
Also, on 9 March, US President Donald J. Trump blamed the oil price war between Riyadh and Moscow, as well as “Fake News” for the steep drop in US stock prices. “Saudi Arabia and Russia are arguing over the price and flow of oil. That, and the Fake News, is the reason for the market drop!” he wrote on tweeter. Trump also said that gasoline prices coming down are good for the American consumer.