By Bradley (Yihan) Tian
In March of 2020, a rupture between Saudi-Arabia and Russia’s oil-producing relationships occurred. A prominent cause behind this disagreement was the reduced Chinese demand of oil due to the COVID-19 pandemic.
As one of the world’s most renowned oil producers, Saudi-Arabia is a leading member in the Organization of the Petroleum Exporting Countries (OPEC). Despite Russia not being in the council, Russian officials were still invited to the OPEC meeting on March 5th as Russia made agreements in coordinating its productions with OPEC+ three years ago.
During the meeting, Saudi-Arabia suggested to reduce production collectively by 1 million barrels per day (bpd), necessitating Russia to reduce its production by 500,000 bpd. This was to maintain oil price and, subsequently, revenue for nations dependent on oil exports. Riyadh advocated for the plan as Asian countries – China and South Korea, specifically – now have greatly reduced oil consumption rates. For instance, refineries in China have cut approximately 20% of foreign oil imports. However, the Kremlin promptly refused the proposal. Its motives remain unclear; some surmised that Russia hoped to maintain low prices to hurt American shale oil industry, while others stated that Russia aimed to exalt its position in seizing Asian and Global oil demands.
Saudi Arabia responded by lowering its oil export price down to $35 per barrel – the largest one-day drop ($11) since 1991 – to start an oil price war with Russia. With a lower price, the Saudis are then able to occupy a larger segment of the remaining demands in Asia. However, the tanking price will also instigate a subsequent global price drop.
The Growing US Shale Oil Industry
In 2014, the US shale oil industry began to rapidly occupy the global oil market. Productions increased from 0.4 million bpd to over 4 million bpd. Saudi Arabia and Russia survived the changes in the market by exporting at a cheaper price to China, which made exporters reliant on Chinese consumers. Although the Saudi-led OPEC has reduced oil production output by over 4 million bpd since 2017, global oil prices remained rather stable due to continuous exports from the US shale industry. Eventually, the US surpassed Saudi-Arabia and Russia and emerged as the largest oil producer in the world in 2018.
The lowered demands in Asia led to the question: will the Saudi-Russian cooperation persist, or it is time for each to fend for itself?
Large-scale Production Cuts Arrive
On April 9th, the OPEC and OPEC+ nations such as Russia agreed to a global production cut of 10 million barrels per day as the worldwide COVID-19 pandemic continues to stagnate oil demands. Despite the collective effort, oil prices continued their decline to $20 per barrel as investors doubted the effectiveness of the 10 million bpd cut in mitigating demand loss and the severe oversupply.
However, the situation may be less that that depicted by the public sentiment. According to the latest Drilling Productivity Report from the Energy Information Administration (EIA), US production outputs are expected to fall by 0.183 bpd from April to May alone. Combining this result with the latest decision released by the OPEC, by the end of 2020 the oil market can potentially become relatively balanced. Nonetheless, predictions and analysis do not always represent the real situation. Currently, there is still a great amount of uncertainty around the global oil markets.
What are your predictions and attitudes towards the current volatilities in the global oil market? Share your thoughts and suggestions in the comments!
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