Russia and Saudi Weaponize Oil Prices

Russia, in a move to gain US oil share, dumped OPEC’s proposal for slashing oil production. In retaliation, Saudi began lowering oil prices by $8-$14 per barrel and proposed an increase in oil production. Global markets came tumbling down but opportunity lies ahead for India to buy cheap oil, reducing its import bill.

Crux of the Matter

The Domino Effect
Russia and the Organization of Petroleum Exporting Countries (OPEC) have been in alliance since 2017 for jointly deciding oil prices. They held a meeting to cut down on oil supply amidst the slowing demand due to Coronavirus. The deal collapsed and Russia denied any subsequent supply cuts before assessing the complete impact of the virus. In retaliation, Saudi Arabia, the highest oil producer among OPEC nations, began offering oil to Asia, US, and Europe at an unprecedented low price. Shocking the oil market across the globe, financial markets toppled in response to Saudi’s rate cut.

Oil price here means the price of a barrel of crude oil. With oil prices plummeting nearly 30%, US oil benchmarkWest Texas Intermediate (WTI) plunged by $10.15 to hit $31.13 per barrel, and Brent Crude Oil benchmark plunged by $10.91 to touch $34.36 per barrel. Brent Crude Oil soared at around $68 at the beginning of the year. As the scare of Coronavirus grew, global trade and travel began to slip. So did the oil prices because of the tepid demand.

Saudi Wants to Show Muscle
Saudi’s retaliation displays that it has enough capacity to increase oil production more quickly than any other country. Some years ago, Saudi had decided that it will not increase oil production beyond 12 million barrels per day (bpd). However, Aramco said that it has been directed by the Ministry to increase oil production to 13 million bpd. Russia’s Energy Minister, Alexander Novak also hinted at another increase of 500,000 bpd. It remains to be seen how will Russia sustain the increment because unlike Saudi which had created reserves for a situation like this to quickly increase oil production in a week or fortnight, Russia does not have that much capacity.

Saudi Arabia’s show of muscle will also come at a cost. The oil-dependent kingdom was expected to have a wider deficit in 2020. With the addition of the price war and anticipation that the crude prices will hover around $35, Saudi’s economic output of 2020 may fall by nearly 15%.

Russia Aims for the Top Spot
US Shale Oil Industries have been thriving since the 2014-16 oil price skid, making US the world’s largest producer of Crude Oil. It produced the world’s 18% oil in 2018. However, the key parameter that drives the growth of American Shale companies is the high price of crude oil. A cheaper crude means that US shale entities would be forced to slash production to sustain.

Russia’s move can be seen in the light of burgeoning American Shale Oil share, which as per Russia, is replaceable. This could also be in retaliation to the US sanction on Nord Stream 2 pipeline that enables Russia to supply gas to Germany at first, and eventually to Europe. Another US sanction on Rosneft subsidiary’s support of the Maduro government in Venezuela may have triggered the Russian price war to capture the share of American shale oil companies.

US oil majors like Chevron and ExxonMobil saw its stock plummet by 12%. Whereas stocks of Pioneer Natural Resources and Occidental Petroleum lost 37% and 52%.

“State actors” are attempting to “manipulate and shock” oil markets…the United States can and will withstand this volatility.

– US Energy Department

Oil Loses, India Wins
Saudi’s retaliation to bring Russia on the negotiation table can benefit India, which is the world’s fourth-largest oil importer. With Saudi Arabia offering oil at $8-$14 less and also increasing its production by 2.5 million barrels per day, India has the opportunity to procure crude oil cheaply. One dollar fall in the price of crude oil reduces India’s import expense by an estimated Rs. 3,000 crores. This could have a large impact on India’s Current Account Deficit (CAD). Inflation in India could also get adjusted as transport expenses gradually come down with cheap crude oil.

Other OPEC and non-OPEC nations that are dependent on oil such as Iran and Venezuela may be worse hit due to the price slash. Oil-dependent emerging economies like Brazil and Nigeria may see a cut in their oil revenue. However, China has stockpiled oil at low prices so that it can avoid buying during times when prices soar. This could also be an opportunity for the second-largest oil consumer China to start stockpiling oil at a cheap rate.

Curiopedia

What are Shale Companies?
The oil shale industry is an industry of mining and processing of oil shale—a fine-grained sedimentary rock, containing significant amounts of kerogen (a solid mixture of organic chemical compounds), from which liquid hydrocarbons can be manufactured. The industry has developed in Brazil, China, Estonia and to some extent in Germany and Russia. The major shale oil producers are China and Estonia, with Brazil a distant third, while Australia, USA, Canada and Jordan have planned to set up or restart shale oil production. More Info

What is WTI?
West Texas Intermediate (WTI), also known as Texas light sweet, is a grade of crude oil used as a benchmark in oil pricing. This grade is described as light crude oil because of its relatively low density, and sweet because of its low sulfur content. It is the underlying commodity of New York Mercantile Exchange’s oil futures contracts. More Info

What is Brent Crude?
Brent Crude is a major trading classification of sweet light crude oil that serves as one of the two main benchmark prices for purchases of oil worldwide, the other being West Texas Intermediate. This grade is described as light because of its relatively low density, and sweet because of its low sulphur content. Brent Crude is extracted from the North Sea and comprises Brent Blend, Forties Blend, Oseberg and Ekofisk crudes. The Brent Crude oil marker is also known as Brent Blend, London Brent and Brent petroleum. Brent is the leading global price benchmark for Atlantic basin crude oils. It is used to price two thirds of the world’s internationally traded crude oil supplies. More Info

Saudi Aramco IPO: China Weighs in to Expand Political Muscle

In the sale of a 2% stake through IPO, Saudi oil giant Aramco is in talks with China for a $10 bn investment. Providing the throttle for the IPO, China has beneficial stakes in ‘One Belt, One Road’ initiative and increasing oil prices, creating a win-win situation for both the countries.

Crux of the Matter
  • Amidst the Aramco valuation issues – Crown Prince estimates it to be $2 trillion – the IPO selling company’s 2% stake will come out at the end of 2019.
  • China’s Sinopec Group, China Investment Corp., Silk Road Fund, and other investors in talks with Aramco to acquire $5 – $10 bn stake in the IPO.
  • Aramco also reached out to Malaysia’s Petronas, offering them participation in the IPO.
  • The triangular situation created from the Aramco-Reliance deal and China-Aramco is yet to provide a clear image of the impact on India-Saudi-China ties.
Curiopedia

Silk Road Economic Belt – Xi Jinping visited Astana, Kazakhstan, and Southeast Asia in September and October 2013, and proposed jointly building a new economic area, the Silk Road Economic Belt. Essentially, the “belt” includes countries situated on the original Silk Road through Central Asia, West Asia, the Middle East, and Europe. The initiative would create a cohesive economic area by building both hard infrastructure such as rail and road links and soft infrastructure such as the trade agreements and a common commercial legal structure with a court system to police the agreements. Read More.