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Oil price war: In reality its about market share

9 1 12
17.03.2020

The common refrain is that Saudi Arabia has launched an oil price war against Russia by boosting production and selling at discounted price, which, coming on top of the pressure from demand destruction caused by climate change action and the onslaught on the global financial system from the coronavirus pandemic, has led to oil price plummeting by some 30% in the past week. Whats the real story?

But is that the whole story? Or, is that the real story? A complex set of factors are at work here.

To recap, the 3-year pact between the OPEC and Russia (known as OPEC ) on production cut summarily ended on March 6 when Moscow refused to go along with a proposal by Saudi Arabia to reduce an additional 1.5 million barrels per day in oil production — 1 million by the OPEC and 0.5 million by the non-OPEC oil-producing countries.

The “price war” of the two largest oil producers could hurt other countries, especially the US. If Washington does not follow up with tough defensive measures, then shale companies will begin to lose market share over time

The “price war” of the two largest oil producers could hurt other countries, especially the US. If Washington does not follow up with tough defensive measures, then shale companies will begin to lose market share over time

Why did Russia take such a stance? The Kremlin spokesman Dmitry Peskov said on March 10 that Moscow was considering different options apropos the situation on the markets before the OPEC negotiations in Vienna three days back, and a “variety of options were calculated and considered in advance.”

Basically, Moscow’s position is that deeper production cuts won’t solve the problem, which is necessarily about the drop in demand for oil.

Putin told a meeting of Russian energy officials and producers on March 1 that the prevailing oil prices [around $50 per barrel] was an acceptable level for Russia since the country’s budget is pegged on an average Brent crude price of $42.40 a barrel.

Putin said at a meeting of energy officials in Moscow on March 1, “Our accumulated reserves, including the National Wealth Fund, are enough for ensuring a stable situation, the fulfillment of all budget and social liabilities, even under a possible deterioration of the global economic situation.”

However, he added, Russia realized the need for some action “including together with foreign partners.”

Read more: OPEC’s oil price strategy fails miserably: What’s next?

According to the transcript released by the Kremlin, Putin told the meeting that OPEC has “proved to be an effective instrument to ensure long-term stability on global energy markets.

Thanks to that, we have obtained extra budget revenues and, what is important, provided a possibility for upstream companies to confidently invest in promising development projects.” The OPEC deal

Clearly, Moscow was not heading for the exit door at the OPEC meeting in Vienna on March 6. The point is, the Saudis ignored Russia’s compromise position, which proposed extending the OPEC agreement with existing quotas and continuing to accurately monitor the volatile market situation.

Whose interests it was that Saudi Arabia was serving? It is known that the US President Donald Trump spoke on the phone to the Saudi Crown Prince........

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