2020 Russia–Saudi Arabia oil price war
On 8 March 2020, Saudi Arabia initiated a price war on oil with Russia, which facilitated a 65% quarterly fall in the price of oil.[1] The price war was triggered by a break-up in dialogue between the Organization of the Petroleum Exporting Countries (OPEC) and Russia over proposed oil-production cuts in the midst of the COVID-19 pandemic.[1] Russia walked out of the agreement, leading to the fall of the OPEC+ alliance.
Prior to the beginning of the price war, oil prices had already fallen 30% since the start of 2020 due to a drop in demand.[2] In the first few weeks of March, US oil prices fell by 34%, crude oil fell by 26%, and Brent oil fell by 24%.[3][4] The price war was one of the major causes and effects of the ensuing 2020 stock market crash.[5]
In early April 2020 and again in June 2020, Saudi Arabia and Russia agreed to oil production cuts.[6][7] The price of oil became negative on 20 April. Though oil production can be slowed, it can not be stopped completely, and even the lowest possible production level resulted in greater supply than demand. As such, those holding oil futures became willing to pay to offload contracts for oil they expected to be unable to store, resulting in enormous profit.[8][9]
Background[edit]
Beginning in 2014, U.S. shale oil production increased its market share; as other producers continued producing oil,[10][11] prices crashed from above $114 per barrel in 2014 to about $27 in 2016. In September 2016, Saudi Arabia and Russia agreed to cooperate in managing the price of oil, creating an informal alliance of OPEC and non-OPEC producers that was dubbed "OPEC+." By January 2020, OPEC+ had cut oil production by 2.1 million barrels per day (bpd), with Saudi Arabia making the largest reductions in production.[12]
As a result of the COVID-19 pandemic, factory output and transportation demand fell, bringing overall demand for oil down as well, and causing oil prices to fall. On 15 February 2020, the International Energy Agency forecasted that demand growth would fall to the lowest rate since 2011, with full-year growth falling by 325,000 barrels per day to 825,000 barrels per day, and a first quarter contraction in consumption by 435,000 barrels per day.[13] Although demand for oil was falling globally, a drop in demand in China's markets, the largest since 2008, triggered an OPEC summit in Vienna on 5 March 2020. At the summit, OPEC agreed to cut oil production by an additional 1.5 million barrels per day through the second quarter of the year (a total production cut of 3.6 million bpd from the original 2016 agreement), with the group expected to review the policy on 9 June during their next meeting.[14] OPEC called on Russia and other non-OPEC members of OPEC+ to abide by the OPEC decision.[12] On 6 March 2020, Russia rejected the demand, marking the end of the unofficial partnership, with oil prices falling 10% after the announcement.[15][16]
Earlier in February 2020, the Trump administration had put sanctions on Russia's largest oil company Rosneft.[17] Russia may have seen the oil war as a way to retaliate against U.S. sanctions, some media outlets claim.[18]
Contrary views on a price war[edit]
Russian and Saudi officials both deny the existence of a price war against each other or any other country. Russian Presidential Press Secretary Dmitry Peskov said that new planned contracts can be implemented immediately if necessary. During the negotiations, Russian officials have argued that it was too early for cuts before understanding the full impact the virus outbreak has on oil prices, and that an existing shortfall of about one million barrels a day, caused by the political turmoil in Libya, was helping to offset a slump in demand at the time.[19]
Pavel Sorokin from the Russian Ministry of Energy doubted that the cuts would work with stating following quotes: "We cannot fight a falling demand situation when there is no clarity about where the bottom is." "It is very easy to get caught in a circle when, by cutting once, you get into an even... worse situation in say two weeks: oil prices would shortly bounce back before falling again as demand continued to fall." when asked in interviews. More reports confirm the Russian side made a proposal to extend the current OPEC+ combined cuts of 1.7 million barrels per day for at least 3 months, in order to assess the real impact the coronavirus crisis has on oil demand before more cuts, with OPEC refusing ultimately.[20]