2020 Russia–Saudi Arabia Oil Price War
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On 8 March 2020,
Saudi Arabia Saudi Arabia, officially the Kingdom of Saudi Arabia (KSA), is a country in West Asia. Located in the centre of the Middle East, it covers the bulk of the Arabian Peninsula and has a land area of about , making it the List of Asian countries ...
initiated a
price war A price war is a form of market competition in which companies within an industry engage in aggressive pricing activity "characterized by the repeated cutting of prices below those of competitors". This leads to a cycle, where each competitor att ...
on oil with
Russia Russia, or the Russian Federation, is a country spanning Eastern Europe and North Asia. It is the list of countries and dependencies by area, largest country in the world, and extends across Time in Russia, eleven time zones, sharing Borders ...
, which facilitated a 65% quarterly fall in the
price of oil The price of oil, or the oil price, generally refers to the spot price of a barrel () of benchmark crude oil—a reference price for buyers and sellers of crude oil such as West Texas Intermediate (WTI), Brent Crude, Dubai Crude, OPEC ...
. The price war was triggered by a break-up in dialogue between the
Organization of the Petroleum Exporting Countries The Organization of the Petroleum Exporting Countries (OPEC ) is an organization enabling the co-operation of leading oil-producing and oil-dependent countries in order to collectively influence the global oil market and maximize Profit (eco ...
(OPEC) and Russia over proposed oil-production cuts in the midst of the
COVID-19 pandemic The COVID-19 pandemic (also known as the coronavirus pandemic and COVID pandemic), caused by severe acute respiratory syndrome coronavirus 2 (SARS-CoV-2), began with an disease outbreak, outbreak of COVID-19 in Wuhan, China, in December ...
. 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. In the first few weeks of March, US oil prices fell by 34%,
crude oil Petroleum, also known as crude oil or simply oil, is a naturally occurring, yellowish-black liquid chemical mixture found in geological formations, consisting mainly of hydrocarbons. The term ''petroleum'' refers both to naturally occurring u ...
fell by 26%, and Brent oil fell by 24%. The price war was one of the major causes and effects of the ensuing 2020 stock market crash. In early April 2020 and again in June 2020, Saudi Arabia and Russia agreed to oil production cuts. 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.


Background

Beginning in 2014, U.S. shale oil production increased its market share; as other producers continued producing oil, 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. As a result of the
COVID-19 pandemic The COVID-19 pandemic (also known as the coronavirus pandemic and COVID pandemic), caused by severe acute respiratory syndrome coronavirus 2 (SARS-CoV-2), began with an disease outbreak, outbreak of COVID-19 in Wuhan, China, in December ...
, 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 The International Energy Agency (IEA) is a Paris-based autonomous intergovernmental organization, established in 1974, that provides policy recommendations, analysis and data on the global energy sector. The 31 member countries and 13 associatio ...
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. 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 Vienna ( ; ; ) is the capital city, capital, List of largest cities in Austria, most populous city, and one of Federal states of Austria, nine federal states of Austria. It is Austria's primate city, with just over two million inhabitants. ...
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. OPEC called on Russia and other non-OPEC members of OPEC+ to abide by the OPEC decision. On 6 March 2020, Russia rejected the demand, marking the end of the unofficial partnership, with oil prices falling 10% after the announcement. Earlier in February 2020, the Trump administration had put sanctions on Russia's largest oil company
Rosneft PJSC Rosneft Oil Company ( stylized as ROSNEFT) is a Russian integrated energy company headquartered in Moscow. Rosneft specializes in the exploration, extraction, production, refining, transport, and sale of petroleum, natural gas, and pet ...
. Russia may have seen the oil war as a way to retaliate against U.S. sanctions, some media outlets claim.


Contrary views on a price war

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. 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.


Events

On 8 March 2020, Saudi Arabia announced unexpected price discounts of $8 to $6 per barrel to customers in
Europe Europe is a continent located entirely in the Northern Hemisphere and mostly in the Eastern Hemisphere. It is bordered by the Arctic Ocean to the north, the Atlantic Ocean to the west, the Mediterranean Sea to the south, and Asia to the east ...
,
Asia Asia ( , ) is the largest continent in the world by both land area and population. It covers an area of more than 44 million square kilometres, about 30% of Earth's total land area and 8% of Earth's total surface area. The continent, which ...
, and
the United States The United States of America (USA), also known as the United States (U.S.) or America, is a country primarily located in North America. It is a federal republic of 50 U.S. state, states and a federal capital district, Washington, D.C. The 48 ...
. The announcement triggered a free fall in oil prices and other consequences that day, with brent crude falling by 30%, the largest drop since the
Gulf War , combatant2 = , commander1 = , commander2 = , strength1 = Over 950,000 soldiers3,113 tanks1,800 aircraft2,200 artillery systems , page = https://www.govinfo.gov/content/pkg/GAOREPORTS-PEMD-96- ...
. The West Texas Intermediate, a grade of crude oil used as a benchmark in oil pricing fell 20%. On 9 March 2020, stock markets worldwide reported major losses thanks in part to a combination of price war and fears over the coronavirus pandemic. Effects were felt outside of oil prices and stock markets as well; following the announcement, the
Russian ruble The ruble or rouble (; Currency symbol, symbol: ₽; ISO 4217, ISO code: RUB) is the currency of the Russia, Russian Federation. Banknotes and coins are issued by the Central Bank of Russia, which is Russia's central bank, monetary authority ind ...
fell 7% to a 4-year low against the U.S. dollar. In the days after the announcement, oil prices and markets recovered somewhat, with oil prices increasing by 10%, and most stock markets recovering the day after Black Monday. On 10 March, Saudi Arabia announced that it would increase its production from 9.7 million barrels per day to 12.3 million, while Russia planned to increase oil production by 300,000 barrels per day. At the time, Aramco's short term oil production capacity was around 12 million bpd (sustained at 10.5 million bpd), and the firm has been instructed to expand this to 13 million. As demand continued to fall dramatically, oil prices went down further, reaching a 17-year low on 18 March where Brent was priced at $24.72 a barrel and WTI at $20.48 a barrel. Oil prices remained depressed for the rest of March. On 2 April, U.S. President
Donald Trump Donald John Trump (born June 14, 1946) is an American politician, media personality, and businessman who is the 47th president of the United States. A member of the Republican Party (United States), Republican Party, he served as the 45 ...
, after significant internal pressure, called Saudi Arabian crown prince
Mohammed bin Salman Mohammed bin Salman Al Saud (; born 31 August 1985), also known as MBS or MbS, is the ''de facto'' ruler of the Saudi Arabia, Kingdom of Saudi Arabia, formally serving as Crown Prince of Saudi Arabia, Crown Prince and Prime Minister of Sa ...
, threatening to withdraw U.S. military support if OPEC and its allies did not cut oil production. The following day, Russian President
Vladimir Putin Vladimir Vladimirovich Putin (born 7 October 1952) is a Russian politician and former intelligence officer who has served as President of Russia since 2012, having previously served from 2000 to 2008. Putin also served as Prime Minister of Ru ...
ordered energy minister Alexander Novak to prepare an extraordinary OPEC meeting and stated that global production could be cut by 10 million barrels. In response to Putin's statement, oil prices jumped. Even with a 10 million bpd cut, the
International Energy Agency The International Energy Agency (IEA) is a Paris-based autonomous intergovernmental organization, established in 1974, that provides policy recommendations, analysis and data on the global energy sector. The 31 member countries and 13 associatio ...
estimated that global oil stockpiles would still increase by 15 million bpd. IEA's director, Fatih Birol, stated that 50 million jobs related to oil refining and retail was at risk globally. US oil prices increased by 25% on 2 April, the biggest one-day increase in history. Brent oil increased to $32 on 3 April. Later on 3 April, Saudi foreign and energy ministers released statements criticising Putin, blaming Russia for not taking part in the OPEC+ agreement. On 9 April, Russia and Saudi Arabia agreed to oil production cuts.
Reuters Reuters ( ) is a news agency owned by Thomson Reuters. It employs around 2,500 journalists and 600 photojournalists in about 200 locations worldwide writing in 16 languages. Reuters is one of the largest news agencies in the world. The agency ...
reported that "If Saudi Arabia failed to rein in output, US senators called on the White House to impose sanctions on Riyadh, pull out US troops from the kingdom and impose import tariffs on Saudi oil." OPEC expected demand to fall by 6.8 million bpd, later to reduce by up to 35 million bpd. On 9 April, OPEC and Russia agreed to reduce by 10 million bpd. USA expected its production to fall by 2 million bpd at the end of the year. OPEC requested Mexico to cut by 400,000 bpd. Mexico proposed to cut its oil production by 100,000 bpd for two months, from 1.781 mbd to 1.681 mbd. The WTI delivery price difference between months resulted in unusually high
contango Contango is a situation in which the futures contract, futures price (or forward contract, forward price) of a commodity is higher than the spot price. In a contango situation, arbitrageurs or speculators are "willing to pay more for a commodity ...
; purchasing cheap physical oil to storage for later sale. On 20 April the price of WTI oil for May delivery (expiring on 21 April) fell into negative territory (-$37/bbl) for the first time in recorded history due to depressed demand and insufficient storage capacity, particularly at the WTI measuring location in Cushing, Oklahoma where pipelines meet and working capacity is around 76 million barrels (technical storage capacity is 92 million barrels). On 24 April, Cushing reached nearly 64 million barrels, or 81% of capacity. Gasoline prices also fell. 104
oil tanker An oil tanker, also known as a petroleum tanker, is a ship designed for the bulk cargo, bulk transport of petroleum, oil or its products. There are two basic types of oil tankers: crude tankers and product tankers. Crude tankers move large quant ...
s came to U.S. shores to offload more oil. While WTI fell on 20 April, some Canadian oil fell to $0, shutting down some production, and Brent oil fell to $18/bbl. A trial for market manipulation is ongoing against Vega Capital London Ltd, a group of nine independent traders at Essex, who would buy oil futures with the expectation to win if the price went down by the end of the contract. However, they are accused of doing so by deliberately buying large volumes and coordinating their activities to artificially push down the price. It is estimated that on April 20 they traded more than BP,
Glencore Glencore plc is an Anglo-Swiss Multinational corporation, multinational commodity trading and mining company with headquarters in Baar, Switzerland, Baar, Switzerland. Glencore's oil and gas headquarters are in London, London, England as well a ...
, and
JPMorgan Chase JPMorgan Chase & Co. (stylized as JPMorganChase) is an American multinational financial services, finance corporation headquartered in New York City and incorporated in Delaware. It is List of largest banks in the United States, the largest ba ...
at around 29.2% of the total volume in WTI crude oil futures, and that their trades were correlated between 96.2% and 99.7%. It is estimated that they made around $660 million altogether in just a few hours. The trial is anticipated to last at least until 2025.


Impact

Oil revenue is a significant government income for several oil producing countries. Low oil price put pressure on state financials.


On Saudi Arabia

Saudi Aramco Saudi Aramco ( ') or Aramco (formerly Arabian-American Oil Company), officially the Saudi Arabian Oil Company, is a majority state-owned petroleum and natural gas company that is the national oil company of Saudi Arabia. , it is the fourth- l ...
announced a cut in capital expenditures from $35–40 billion planned to $25–30 billion. The government also increased its debt ceiling from 30 to 50 percent of GDP, due to both oil prices and the impact of the pandemic, and planned to cut its spending by 5 percent as its budget deficit was expected to increase from 6 to 9 percent.


On Russia

The Russian government had initially forecast that it would run a surplus of 930 billion roubles ($11.4 billion) in 2020, but following the outbreak of the price war stated that it expected to run at a deficit. The ruble has dropped, having fallen over 30 percent between the start of 2020 and 18 March.


On the stock markets

Prior to opening on 9 March 2020 (Monday), the
Dow Jones Industrial Average The Dow Jones Industrial Average (DJIA), Dow Jones, or simply the Dow (), is a stock market index of 30 prominent companies listed on stock exchanges in the United States. The DJIA is one of the oldest and most commonly followed equity indice ...
futures market A futures exchange or futures market is a central financial exchange where people can trade standardized futures contracts defined by the exchange. Futures contracts are derivatives contracts to buy or sell specific quantities of a commodity or f ...
fell over 1,300 points and suspended trading as a result due to a combination of coronavirus concerns and the oil price war. On Monday, 9 March 2020, stock markets globally experienced major point drops due to a combination of panic over the COVID-19 pandemic and the price war between Saudi Arabia and Russia. The
Dow Jones Dow Jones is a combination of the names of business partners Charles Dow and Edward Jones. Dow Jones & Company Dow, Jones and Charles Bergstresser founded Dow Jones & Company in 1882. That company eventually became a subsidiary of News Corp, an ...
fell over 2,000 points, or 7.8%, exceeding the futures market prediction and becoming the largest point drop in its history. Other stock markets were similarly affected, with the
S&P 500 The Standard and Poor's 500, or simply the S&P 500, is a stock market index tracking the stock performance of 500 leading companies listed on stock exchanges in the United States. It is one of the most commonly followed equity indices and in ...
contracting by 7.6% and the
NASDAQ Composite The Nasdaq Composite (ticker symbol ^IXIC) is a stock market index that includes almost all stocks listed on the Nasdaq stock exchange. Along with the Dow Jones Industrial Average and S&P 500, it is one of the three most-followed stock market i ...
contracting by 7.2%. Italy's
FTSE MIB The FTSE MIB (Milano Indice di Borsa) (the S&P/MIB prior to June 2009) is the benchmark stock market index for the Borsa Italiana, the Italian national stock exchange, which superseded the MIB-30 in September 2004. The index consists of the 40 m ...
suffered the largest drop in percentage, with the index falling 11%. In the United States, the drops triggered circuit breakers designed to prevent stock market crashes, leading to 15-minute pauses in trading.


On other producers

In response to the drop in price, multiple oil producers in North America cut the drilling of new wells. Shale oil producers in North America generally require oil prices above $40 per barrel to sustain operations, and the cuts in new oilfields is expected to nullify the expected growth in US oil production. At $35 per barrel of crude oil, only 16 shale producers could operate new wells profitably, and most producers had expected a per barrel price of $55–65 in 2020. Consultancy firm Wood Mackenzie estimated that with Brent at $25/barrel, 10% of oil production globally would not be able to cover its base operating cost, particularly heavy crude oil producers such as Venezuela, Mexico and
oil sands Oil sands are a type of unconventional petroleum deposit. They are either loose sands, or partially consolidated sandstone containing a naturally occurring mixture of sand, clay, and water, soaked with bitumen (a dense and extremely viscous ...
in Canada, where the price dipped below $5 per barrel. The U.S. Energy Information Administration forecasts show that U.S. crude oil production would fall from 13.2 million bpd in May 2020 to 12.8 million bpd in December 2020 due to the price war, and would then fall to 12.7 million bpd in 2021. In the US, Whiting Petroleum Corporation, which produced 120,000 barrels per day, was the first major producer to declare bankruptcy due to the oil price crash. Diamond Offshore Drilling, an
offshore drilling Offshore drilling is a mechanical process where a wellbore is drilled below the seabed. It is typically carried out in order to explore for and subsequently extract petroleum that lies in rock formations beneath the seabed. Most commonly, the ter ...
contractor, also filed for bankruptcy, citing the price war and the drop in oil demand due to the coronavirus pandemic.
Iraq Iraq, officially the Republic of Iraq, is a country in West Asia. It is bordered by Saudi Arabia to Iraq–Saudi Arabia border, the south, Turkey to Iraq–Turkey border, the north, Iran to Iran–Iraq border, the east, the Persian Gulf and ...
i and
Kuwait Kuwait, officially the State of Kuwait, is a country in West Asia and the geopolitical region known as the Middle East. It is situated in the northern edge of the Arabian Peninsula at the head of the Persian Gulf, bordering Iraq to Iraq–Kuwait ...
i oil producers also announced price discounts to their buyers, though Iraq's discount was lower than that of Saudi Arabia's. The
United Arab Emirates The United Arab Emirates (UAE), or simply the Emirates, is a country in West Asia, in the Middle East, at the eastern end of the Arabian Peninsula. It is a Federal monarchy, federal elective monarchy made up of Emirates of the United Arab E ...
also announced an increase in production to 4 million barrels per day, higher than the country's estimated output capacity of 3.5 million bpd. Saad al-Kaabi, Qatar's minister of state for energy affairs, described the price war as a "very big mistake" in a June 2020 interview.
Norway Norway, officially the Kingdom of Norway, is a Nordic countries, Nordic country located on the Scandinavian Peninsula in Northern Europe. The remote Arctic island of Jan Mayen and the archipelago of Svalbard also form part of the Kingdom of ...
, Europe's largest oil exporter, saw a drop in its currency to historic lows against the Euro, with the Norwegian Central Bank preparing a currency intervention for the first time in two decades. Nigeria's Central Bank also devalued its naira against the dollar, while the country's stock market and bond prices (alongside
Angola Angola, officially the Republic of Angola, is a country on the west-Central Africa, central coast of Southern Africa. It is the second-largest Portuguese-speaking world, Portuguese-speaking (Lusophone) country in both total area and List of c ...
's) fell.


See also

* 2020 stock market crash *
Economic impact of the COVID-19 pandemic The COVID-19 pandemic caused far-reaching economic consequences including the COVID-19 recession, the second largest global recession in recent history, decreased business in the services sector during the COVID-19 lockdowns, the 2020 stock m ...
* Russia–Saudi Arabia relations *
1973 oil crisis In October 1973, the Organization of Arab Petroleum Exporting Countries (OAPEC) announced that it was implementing a total oil embargo against countries that had supported Israel at any point during the 1973 Yom Kippur War, which began after Eg ...
* 1980s oil glut *
2010s oil glut The 2010s oil glut was a significant surplus of Petroleum, crude oil that started in 2014–2015 and accelerated in 2016, with multiple causes. They include general oversupply as Unconventional (oil & gas) reservoir, unconventional US and Canadi ...
* 2021–2023 global energy crisis *
Petroleum politics Petroleum politics have been an increasingly important aspect of diplomacy since the rise of the petroleum industry in the Middle East in the early 20th century. As competition continues for a vital resource, the strategic calculations of major ...


References

{{DEFAULTSORT:2020 Russia-Saudi Arabia oil price war Russia-Saudi Arabia oil price war Russia-Saudi Arabia oil price war Saudi Arabia-Russia oil price war Russia-Saudi Arabia oil price war Oil price war, Russia-Saudi Arabia, 2020 Russia–Saudi Arabia relations Petroleum economics History of the petroleum industry Pricing controversies