While neither Moscow nor Riyadh want to see oil trading at record lows, their failure to agree on how to boost the market has led to an all-out price war. The only question is who will benefit most from the situation.
Monday’s steep fall came amid already-softening demand for oil from China, with the coronavirus outbreak taking its toll on the world’s second largest economy. So when Russia did not support new cuts agreed by the members of OPEC, this only added fuel to the fire, triggering retaliation from Saudi Arabia.
Also on rt.com Now it’s America’s turn: Dow opens 7% down after day of markets falling worldwide
Thus it is Moscow that started this crude price war, Sergey Kopylov, a junior partner at consulting company BSC, has told RT. However, Russia has far greater resources to support its economy amid oil market turmoil, while the situation is different for Saudi Arabia, he said.
“On the one hand, Saudi Arabia is interested in high oil prices and having a big crude market share, as well as Russia,” the analyst said. “On the other hand, Saudi Arabia, unlike Russia, cannot withstand low oil prices for a long period of time. They have much more narrow safety margin in their budget system.”
Read more
Another weakness of the kingdom is its dependence on oil revenues and a $50 billion budget deficit, Lebanon-based analyst Kamel Wazne noted earlier. The Russian economy is also sensitive to energy crises, despite the growth of its non-oil and non-gas revenues. However, Moscow says that it has enough reserves to support the national economy for several years even if the situation deteriorates.
While time will tell which of the two oil heavyweights can balance the books against the odds, Russia did not turn its back on the Saudi-led OPEC for no reason. Oil has historically faced oversupply amid a lack of demand and vice versa, but while the signatories of the oil deal were trying to boost the demand, the gap was immediately filled by US firms, mainly by shale oil producers. And they are the ones who will be most severely hit.
Those companies cannot survive if prices remain low for too long, as shale oil extraction is more expensive, analysts warn. Moreover, if the companies collapse, investment flows into the sector will come to an end.
“Small producers that are focused only on expensive shale oil… are doomed, and consequently all the money that was invested into them will be buried,” Kopylov said.
While American energy majors like Exxon Mobil and Chevron would still be able to subsidize their shale oil fields, the closures of those small businesses that are focused exclusively on shale would partly eliminate the supply glut and could finally bring more long-awaited stability to the markets. This ‘shock therapy’ will take up to two years to yield results, and when the situation changes, Kopylov believes, Russia and OPEC may finally to return to the negotiating table.
For more stories on economy & finance visit RT’s business section
Comments are closed.