Saudi-Russian oil price war 2020 explained: will a truce be reached?

11:01, 8 April 2020

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Saudi-Russian oil price war 2020 explained

Crude oil futures sank at the start of the week and are set to remain under downward pressure in the near term, driven lower by an aggressive price war between two of the world’s largest producers.

The oil market is experiencing unprecedented turmoil, crashing by a record 68 per cent in the first quarter on a lethal combination of plunging demand from economies locked down by the coronavirus pandemic and oversupply from producers as Saudi Arabia and Russia row over output cuts.

The global benchmark month-ahead Brent crude oil price plummeted to an 18-year low last week, falling to $21.65 per barrel intraday on March 30, with the US benchmark West Texas Intermediate (WTI) price dropping to an intraday low of $19.27 per barrel.

Brent crude oil had already begun falling from the $68 per barrel level seen at the start of the year as the coronavirus pandemic first prompted lockdowns in China – hitting demand for fuel for industry and transport – then spread to countries around the world.

But the oil price decline accelerated on March 6 when OPEC+ – a group that includes Organisation of the Petroleum Exporting Countries (OPEC) members as well as other oil-producing nations – failed to reach an agreement to renew output curbs.

The market has since fallen by around 30 per cent, one of the sharpest declines in its history, leaving investors wondering who will win the oil price war and what affect the oil price war latest news will have on the market in the long term.

To have the oil price war 2020 explained in detail to help you better navigate the latest market turbulence, this article breaks down who the key participants are and what each of them wants. In addition, you will find a video in which David Jones, chief market strategist at Capital.com, explains the effect of the spat on prices and suggests key trading levels.

How it all started: motives for the oil price war

Tensions between OPEC member Saudi Arabia and non-OPEC producer Russia – two of the world’s largest oil producers – have been brewing for months.

Saudi Arabia pushed its allies back in December to extend a three-year deal to cut production to support oil prices in the face of slowing oil demand. While the Middle Eastern country reduced its output by more than its target, most other major oil producers failed to comply. With the agreement due to expire at the end of March, OPEC proposed a production cut of 1.5 million barrels per day until the end of the year. However, the deal was contingent on support from non-OPEC producers led by Russia, which it declined to provide. That prompted the dramatic 10 per cent drop in prices on March 6.

oil price war 2020

Saudi Arabia immediately responded by steeply discounting its prices to customers to grab market share, driving the market down further. Both countries have since increased their production and engaged in a blame game over who is responsible for the subsequent decline in the market, each hinting the other’s ultimate goal is to hurt the US shale oil industry.

The recent boom in shale oil production has pushed the US ahead of Russia and Saudi Arabia to become the world’s largest oil producer, and the Russian industry has been hit by US sanctions. The prospect of sustained lower oil prices is raising fears that shale producers with higher production costs will go bankrupt, hitting the share prices of companies throughout the industry.

Watch David Jones, our chief market strategist, provide further background on the current fundamentals of the oil market, and give you the key price levels to watch for your trades:

 

The latest developments in the Saudi-Russian price war towards a truce

Indications that the countries could be close to a truce brokered by the US boosted oil prices by more than 20 per cent on April 2, the largest one-day rally on record. The market made further gains the following day.

But Russian President Vladimir Putin pointed the finger at Saudi Arabia in an April 3 video conference with government officials and the heads of Russian oil majors, stating that Russia proposed extending the deal in early March and wanted to avoid a situation in which prices fell too low. Russian energy minister Alexander Novak added: “Unfortunately, our partners from Saudi Arabia did not agree to extend the current deal on current conditions, in fact, they withdrew from the agreement and announced significant additional discounts on their oil, as well as plans for a sharp increase in production.”

The Saudi Minister of Foreign Affairs, Prince Faisal bin Farhan Al Saud, responded on April 4 that the statements were “fully devoid of truth.” He said: “the withdrawal of the kingdom from the agreement is not correct, but Russia was the one that refused the agreement. While the Kingdom and 22 other countries were trying to persuade Russia to make further cuts and extend the agreement, yet Russia has not agreed.”

An emergency video conference between members of OPEC+ and other countries that was scheduled for April 6 was delayed over the weekend until April 9, hitting futures prices when the market opened Sunday night. Saudi oil producer Aramco on April 5 delayed issuing its monthly oil prices, to await the outcome of the meeting.

OPEC+ is discussing a record coordinated cut of 10 million barrels per day, equivalent to around 10 per cent of global consumption. It remains unclear whether the US will participate in cuts, with some industry leaders opposed and others open to involvement.

US President Donald Trump is not inclined to help OPEC and confirmed in a news conference on Sunday that he would be prepared to introduce tariffs on Russian and Saudi oil imports, to protect the domestic industry.

Oil price war forecast: what is the outlook for the market?

The oil price war between Saudi Arabia and Russia comes at a time of extensive demand destruction caused by the disruption of economic activity by the coronavirus pandemic. The International Energy Agency (IEA) expects oil demand to fall this year for the first time since 2009.

Demand could drop by 15-20 million barrels per day in the next few weeks, amounting to 20 per cent of global production, Russia’s Novak said, estimating that demand has already fallen by 10-15 million barrels per day. The world is coming up against the limits of its storage capacity, which is set to be full within two months at current production levels and could be the catalyst for producers to finally reduce output.

The oil price war “has made a coordinated supply response impossible to achieve in time,” analysts at Goldman Sachs said in a research note, revising their forecast for demand to fall by 26 million barrels per day from 18 million previously. “The ultimate magnitude of these shut-ins, which is still unknown, will likely permanently alter the energy industry and its geopolitics,” the analysts said, noting that landlocked crude production in the US, Russia and Canada is the most likely to be affected. “Now the question is: can the US and OPEC save this market?”

“Oil has seen many crises, but none as ferocious as today's,” said Fatih Birol, executive director of the IEA, adding that some production will grind to a halt and cuts to investment will hit the industry, putting “huge strains on some exporter countries”.

“Although demand for oil will rebound when the crisis eases, the dislocation could accelerate some structural changes in the way the world consumes oil,” IEA analysts said in a report last week.

That being said, it is important to note that the entire situation with the oil price war 2020 is very fluid right now, with the market acting rather unpredictably. Today, investors and traders need to be ready to make quick, yet thoughtful decisions to stay afloat during the times of economic turbulence.

Join Capital.com to always stay up to date with the latest oil news in spring 2020 and spot the best trading opportunities.

Read more: How to invest in oil with little money? Your top 5 options

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