The international crude oil price has crashed to more than 34%, lowest in four years, to sell for $27.34 a barrel, as Saudi Arabia takes on its one-time ally, Russia in price war.
According to reports, the move by Saudi Arabia to flood the market with crude was in a bid to recapture market share, after implosion of an alliance between OPEC and Russia, which had been restraining oil supply since the start of 2017 in an attempt to support prices.
The report obtained from CNN stated that Russia had refused to go along with OPEC’s proposal to rescue the coronavirus-battered oil market by further cutting production at a meeting in Vienna on Friday. The standoff left the oil industry shell-shocked and sparked a 10% plunge in oil prices Friday. Crude oil was already stuck in a bear market because of a sharp drop in demand linked to the coronavirus outbreak.
Saudi Arabia escalated the situation further over the weekend. The kingdom slashed its April official selling prices by $6 to $8, according to analysts, in a bid to retake market share and heap pressure on Russia.
“The signal is Saudi Arabia is looking to open the spigots and fight for market share,” said Matt Smith, director of commodity research at ClipperData. “Saudi is rolling up its sleeves for a price war.”
Analysts said that Russia’s refusal to cut production amounted to a slap to US shale oil producers, many of which need higher oil prices to survive, the report added.
“Russia has been dropping hints that the real target is the US shale oil producers, because it is fed up with cutting output and just leaving them with space,” analysts at energy consulting firm FGE wrote in a note to clients Sunday. “Such an attack may be doomed to failure unless prices remain low for a long time.”
The 2014-2016 oil crash caused dozens of oil and gas companies to file for bankruptcy and hundreds of thousands of layoffs. However, the US shale industry emerged from that period stronger and the United States would eventually become the world’s leading oil producer.
“The perils of playing a game of brinksmanship with Vladimir Putin were proven in dramatic fashion,” Helima Croft, head of global commodity strategy at RBC Capital Markets, wrote in a Friday note to clients. “It is hard to see how the relationship can easily be put back on a solid footing.”
This price war and the fall of oil price is not a good news for Nigeria and the President Muhammadu Buhari led administration, who in its 2020 budget, had pegged the crude oil benchmark at $57 per barrel, with the hope that the price will keep on increasing.
Also the President could order for more borrowing, to fund the oil-dependent budget as fears continues to grow about the spread of the coronavirus which has seen prices dropped. But it will all depend on how long Saudi Arabia and Russia continue their price war, and decisions from other oil producing nations.
We are waiting to see how other member countries and non-member countries react to this latest move by Saudi Arabia, as the latest move if not urgently reverted, could plunge most of these countries that rely heavily on the revenue from crude, into recession.