A disagreement between OPEC and Russia over further and deeper coil production cuts resulted in the two parting ways after three years of working together to reduce oil production so that global oil prices could be shored up.
The latest move by OPEC to reduce production was proposed in order to address the drop in demand for crude because of the global coronavirus attack.
Responding to the Russian decision, OPEC itself decided to remove all limits that it imposed on itself with relation to cutting production of crude.
Following the development, global oil prices dropped by 10 per cent – ushering in fears of the 2014 price crash when there was a rivalry between Saudi Arabia and Russia over market share with shale oil production in the United State. US shale oil producers were never part of the production cuts that OPEC and Russia have been imposing since the last three years.
So far this year, about one third of its value has been lost by Brent and is now moving towards the $45 a barrel price which would be the lowest for it since 2017. That is slated to put pressure on many oil dependent economies even as the global economy is hit by the economic impact of the coronavirus outbreak because of shut down of production units and ban on travelling.
“From April 1 neither OPEC nor non-OPEC have restrictions,” Russian Energy Minister Alexander Novak told reporters after marathon talks at the OPEC headquarters in Vienna on Friday.
“I will keep you wondering”, said Saudi Energy Minister Prince Abdulaziz bin Salman when reported asked whether the kingdom had plans to increase production.
This breakdown in the talks could have far reaching implications between Russia and OPEC’s de facto leader Saudi Arabia who had supported opposite sides in the Syrian war and have developed a larger political partnership over the issue as well.
“Russia’s refusal to support emergency supply cuts would effectively and fatally undermine OPEC+’s ability to play the role of oil price stabilizing swing producer,” said Bob McNally, founder of Rapidan Energy Group.
“It will gravely rupture the budding Russian-Saudi financial and political rapprochement. The result will be higher oil price volatility and geopolitical volatility,” he said.
Shale producers in the US are also expected to feel the pressure of a drop in global oil prices because the costs of production of shale oil is much higher compared to that of Russian and Saudi production.
“This crisis has revealed that Saudi is not willing to keep a floor under shale and other producers. They are expediting the slowdown on shale,” said Christyan Malek, head of JP Morgan oil and gas research for Europe, Middle East and Africa.
In theory, the breakdown of the talks means that OPEC members as well as non-OPEC producers will be able to produce as much oil as they please in a global oil market that is already oversupplied.
“This is an unexpected development that falls far below our worst case scenario and will create one of the most severe oil price crises in history,” said Bjoernar Tonhaugen of Rystad Energy
(Adapted from ForeignPolicy.com)