On Sunday, the oil prices crashed by 30 percent. They fell from the already low price of $45 a barrel for Brent crude to $31.52. This is because Saudi Arabia has successfully declared a price war in the global oil market, which retaliates against Russia’s refusal to work with OPEC with steep, punishing discounts. Oil prices were already down due to the currently near-stagnant economy, and the demands for transportation fuels are mainly in China.
This may have big repercussions for U.S. energy producers that face a potential loss of customers and lower prices, as Saudi Arabia seeks sales volumes at the expense of U.S and Russian producers. What’s more important are the consequences of these geopolitics.
Oil War – The Fight for Black Gold
Up until this month, OPEC+ claimed that it maintained “cuts” of about 2.1 million barrels per day. The group, in theory, boosted prices by restricting supply. However, it was never clear how big the cuts are in reality. When Saudi Arabia asked Russia to cut oil production even further, Russia refused. Later, it was announced that it would no longer respect any restraints. Saudi Arabia responded with oil production expansion to more than 10 million barrels per day, seeking increased market share.
What Caused the Russia-Saudi split?
The reaction of Russia should not have been surprising. Russia’s exports make up less than 10 percent of the consumption of the world. This is why it tries to collaborate with OPEC. They collectively produce about 40 percent of the oil of the world.
Can Oil Prices Get Any Lower?
Yet, running an oil cartel can be difficult. It’s due to the fact that no member really wants to cut from their own production of oil and lose sales just to boost the overall price. Members promise to contribute, but neither OPEC+ or OPEC has real power to make sure that they will make their promises.