Price War Ended Between Saudi Arabia & Russia

Price War Ended Between Saudi Arabia & Russia

It looks like Saudi Arabia and Russia have buried their differences in a showdown on oil price war. Both countries have agreed to slash output together with other members of the OPEC alliance in effort to lift the market from a pandemic driven collapse.

The tentative deal came after strong pressure from U.S. President Donald Trump and American lawmakers, who fear thousands of job losses in the U.S. shale patch, not to mention Wall Street chaos. The price crash has also threatened the stability of oil-dependent nations and forced companies from Exxon Mobil Corp. to small independents to rein in spending.

OPEC and its allies, meeting by video conference, agreed to cut production by about 10 million barrels a day in May and June, delegates said, asking not to be identified ahead of an official statement. Saudi Arabia and Russia, the biggest producers in the group, will each take output down to about 8.5 million a day, with all members agreeing to cut supply by 23%, one delegate said.

“Both Saudi and Russia were going to have to cut anyway, and these cuts allow them to win political points too,” said Amrita Sen, chief oil analyst at consultant Energy Aspects Ltd.

While the headline cut equates to a historic reduction of about 10% of global supply, it makes up just a fraction of the demand loss, which some traders estimate at as much as 35 million barrels a day.

“Covid-19 is an unseen beast that seems to be impacting everything in its path,” Mohammad Barkindo, secretary-general of the Organization of Petroleum Exporting Countries, said in a speech at the online gathering. “The supply and demand fundamentals are horrifying” and the expected oversupply, particularly in the second quarter, is “beyond anything we have seen before.”

Barkindo urged action to tackle the growing surplus, which he estimated at 14.7 million barrels a day in the second quarter. And he wants action not only from OPEC+ producers but from nations beyond the alliance.

On top of the planned 10 million-barrel reduction, OPEC+ is seeking cuts of as much as 5 million a day from Group of 20 countries, delegates said.

A contribution from the G-20, whose energy ministers are set to hold talks on Friday, could give extra potency to efforts to revive prices. Russia has insisted that the U.S. in particular do more than just let market forces reduce its record production. Trump, meanwhile, has said America’s cut will happen “automatically” as low prices put shale in dire straits, a sentiment reiterated by his energy secretary on Thursday.

Tapering Off. OPEC+’s tentative plan would see the output curbs tapering off after two months, depending on the evolution of the coronavirus. The 10 million-barrel-a-day cut may shrink to 8 million a day from July and then 6 million a day from January 2021, according to one delegate.

Saudi Arabia will apply its reduction to a production level of about 11 million barrels a day, a delegate said. That’s lower than recent output levels, which rose above 12 million a day in early April.

The oil price war, which started in March after the collapse of previous OPEC+ talks, lasted exactly 31 days, far fewer than similar feuds in 1986, 1998 and 2016. But in that short period, it has forced companies from Big Oil giants to U.S. shale independents to slash spending, fire workers and cancel projects. Meanwhile, oil-rich countries have gone cap-in-hand to the International Monetary Fund and the World Bank for help, hobbled by low prices.