The oil war between major oil producers that commended in March of this year when Saudi Arabia began offering unprecedented discounts and flooding the market in an attempt to capture a larger share of the market from other oil producers caused the biggest oil price fall for over 20 years.
It all began on March 8 when Riyadh cut its April pricing for crude sales to Asia by $4-$6 a barrel and to the U.S. by $7 a barrel. The Kingdom expanded the discount for its flagship Arab Light crude to refiners in northwest Europe by $8 a barrel offering it at $10.25 a barrel under the Brent benchmark.
In comparison, Russia’s Urals crude trades at a discount of about $2 a barrel under Brent. These actions became an attack at the ability of Russia to sell crude in Europe. The Russian rouble immediately plummeted almost 10% falling to its lowest level in more than four years.
The formal pretext of this campaign was the inability of the OPEC+ (a meeting of representatives of member states of the Organization of the Petroleum Exporting Countries and non-OPEC members) to extend output limitation agreements. Although it had a serious impact on strategic rivals and ‘adversaries’ of the Saudi’s and their principal patron and weapons supplier the US (particularly Russia, Iran, Venezuela), it also seriously affected the revenues and economies of the Saudis themselves as well as all other major producers (with very serious consequences in Iraq given the country’s precarious political, security and economic situation).
As oil prices begin to recover from the plunge in prices and demand, OPEC + is set to meet soon to discuss an extension to existing cuts oil, which were agreed upon in an attempt to push up oil prices from their record lows.
The Saudis now appear to be seeking support from other OPEC + members to keep production levels lower for longer. Any changes to the existing deal — struck in April as energy demand and prices collapsed because of the coronavirus pandemic – depend in large part on negotiations between Moscow and Riyadh. Although Russia has indicated it wants to start easing the cuts next month as planned, the two countries have pledged to continue discussions on coordination of oil production rates.
The alliance scheduled its biggest cuts — the largest coordinated supply restrictions in the oil market’s history — for May and June, when they figured the worst of the pandemic’s effects would be felt.
Prices have rebounded but are still far below desirable levels for many OPEC+ members, and with the global economy only just starting to recover, many members are pushing to maintain the deeper cuts. According to media reports and official statements, the main impediment to modifying the agreement is a disagreement between the Saudis and Russia over the length of a possible extension, though another major problem is ensuring compliance with agreements.
The 23-nation coalition of OPEC and its allies committed to lowering output by 9.7 million barrels a day, or about 10% of global supply, in May and June. In addition, Saudi Arabia, Kuwait and the United Arab Emirates made further voluntary cuts of about 1.2 million barrels a day for June, bringing the total OPEC+ curbs to almost 11 million barrels a day.
Those cuts are meant to be eased to about 7.7 million barrels a day in July, followed by an additional tapering at the start of 2021. Nigeria and the state oil company of Abu Dhabi, the United Arab Emirates’ capital, have already announced plans to increase exports next month.
To ensure OPEC+ responds quickly to developments, meetings of either the entire group or the ministerial committee that oversees the deal made in April could occur as often as every month over the summer.
An earlier meeting date would give the oil cartel more flexibility to change its current production limits. OPEC members usually decide their plans for shipping oil to customers for July in the first week of June, so an earlier meeting would give them more time to react.
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