The Main Result of the Cataclysms of 2020 in the Oil Market

How Russia won the world in the oil war

OPEC+ countries have agreed to gradually increase oil production by 2 million barrels per day after March, Russian Deputy Prime Minister Aleksandr Novak said.

The participants of the cartel agreed that they will mainly maintain the January production levels in February, only Russia and Kazakhstan will increase production by 65,000 barrels per day (b/d) and 10,000 b/d, respectively. And in March, Russia and Kazakhstan will increase oil production by the same amount. At the same time, Saudi Arabia will reduce its production quota by another 1 million b/d in February-March. “This is a very large figure, and this is due to the desire of Saudi Arabia to reduce the balances on the world oil markets at a faster pace, bringing them to the average five-year level,” Novak explained.

“We also agreed that it will be necessary to monitor the situation on the market and gradually restore production by 2 million b/d, which were provided for in the agreement. Naturally, we will need April, May, and June for this, depending on how the market situation develops,” the Russian Deputy Prime Minister added.

As is known, the agreed policy of the countries participating in the OPEC+ deal is a consequence of the price war that broke out in March 2020 in the oil market. Back then, faced with a drop in demand and prices due to the notorious pandemic, the Saudis demanded from other market participants, from Russia first of all, to sharply reduce production, and having been refused, they lifted all restrictions on their own production.

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As a result, the price of black gold collapsed to $20 per barrel (BRENT). Commentators practiced apocalyptic predictions, comparing what was happening with 1985, when Saudi Arabia made a similar feint, and the period of low oil prices that began and lasted for 17 years led to huge problems for the USSR and, as it is believed, became one of the main reasons for its collapse. These commentators were particularly gloating over the fact that Russia, they say, provoked the oil war itself by not accepting the Saudis’ “reasonable” proposals to reduce production. And when the main exporting countries reached an agreement, it was interpreted almost as the capitulation of Russia.

OPEC+ countries

Meanwhile, the Strategic Culture Foundation noted back then that “the crisis of overproduction in the world oil industry was provoked by the ‘shale revolution’ in the United States; the Americans in recent years have come close to Russia and Saudi Arabia in oil production. At the same time, they did not participate in any OPEC+, rampantly increasing production and forcing OPEC competitors to bear all the costs caused by reducing production in order to maintain the price.”

At the same time, the weak point of American shale producers is the high cost of oil produced by them; the minimum profitability threshold for them is $40 – and even then only on the best fields in terms of production conditions.

Insisting on a sharp reduction in production by OPEC+ members, the Saudis played along with the Americans, and this was caused not only by the problems of the Kingdom, whose economy is in dire need of expensive oil, but also by the wishes of the overseas power, on which Saudi Arabia critically depends in many areas.

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The price war of spring 2020 has become a war of nerves and a test of the safety margin of each of the major oil-producing powers. And this is not only Russia and Saudi Arabia, but also the US. Judging by the commitment made by the Saudis (together with the UAE and Kuwait) to reduce production over the established quotas by another 1.5 million barrels, they still had to pay. Russia, on the other hand, achieved a reasonable compromise that ensured a generally acceptable price for oil and, most importantly, the preservation of traditional sales markets.

Meanwhile, while OPEC+ cut production, American shale oil broke out on world markets, displacing traditional suppliers (and it is always difficult to return to lost markets). In addition, the established price level is hardly acceptable for American shale producers, which means that their further expansion will be limited.

The official position of the Russian side is that oil production should be gradually increased in the context of the expected recovery of the world economy.

The results of the last OPEC+ meeting on January 4th showed who was the main winner in this oil war: the partners agreed to increase the Russian quota, and the Saudis once again “voluntarily” reduced production. We can say that Russia won not only the price war, but also the world. The Russian economy has adequately withstood the spring collapse of prices, and the period of their relatively low level (since March 2020) against the background of other economic problems (“pandemic”). Russia’s international reserves even grew by about $30 billion over this period.

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Now all Russia’s partners in the field of oil production understand that it is pointless to talk to Moscow from a position of strength or to frighten it with new price wars.

If a year ago OPEC+ provided the Americans with a price level and freed them a niche in the market, now the Saudis and their Middle Eastern allies have to free up a niche in the market for Russia in order to maintain a little bit of a price level that suits them (and the Americans). And this is the main result of the cataclysms of 2020 in the oil market.

Anton Kanevsky

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