Published: 23rd Mar, 2020
The collapse of alliance between Saudi Arabia and Russia threatens to plunge the industry into a generation-defining freefall with few precedents.
Context
The collapse of alliance between Saudi Arabia and Russia threatens to plunge the industry into a generation-defining freefall with few precedents in modern history.
About
OPEC+ refers to the alliance of crude producers, who have been undertaking corrections in supply in the oil markets since 2017.
- Currently, there are 21 sovereign producing nations complying with the alliance's decisions, with Saudi Arabia leading the 11 OPEC members party to the deal and 10 non-OPEC members led by Russia.
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Background:
- In 1985, Saudi Arabia, after years of shouldering OPEC production cuts nearly by itself, gave up and launched a price war.
- Prices collapsed almost 70% between November 1985 and May 1986.
- The kingdom crashed the market again in 1997, its patience worn thin by Venezuela’s over-pumping. In the next year and a half, prices fell 50%.
- And in 2014, Saudi launched a price war after it failed to convince non-OPEC countries, including Russia, to join in an output cutback. Prices declined 65% over the next six months.
- But none of those previous scenarios took place while demand was going through a brutal contraction, much less one triggered by the worldwide spread of a deadly virus.
The impact:
- The alliance between Saudi Arabia and Russia was the only thing that kept the world oil market from tumbling into the abyss.
- Now its collapse threatens to plunge the industry into a generation-defining freefall with few precedents in modern history.
- The most immediate pain is likely to be felt in the US shale industry, where companies have already been struggling as investors lost enthusiasm for the sector. In part, that’s what the Russian energy ministry has been aiming for.
- Still, the hurt is likely to be spread much more widely across the world, from commodity-dependent countries like Angola and Oman, to energy giants like Exxon Mobil Corp and Royal Dutch Shell Plc.
While Russia would not mind to back down and return to the status quo, Saudi Arabia appears determined to continue the confrontation. Their next moves will be determined by their readiness to take on further economic losses and their appetite for escalating tensions.
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