Saudi Arabia may have won an oil price war with Russia, but according to experts, the KSA strategy has contributed to the collapse of crude prices affected by the emerging Coronavirus, despite an agreement to cut historic production.
US crude oil futures fell below zero for the first time in history on Monday, amid an oversupply that was exacerbated by the price war that began in March between the two oil powers.
Saudi Arabia, a member of the Organization of the Petroleum Exporting Countries, increased oil production to record levels in March and April and offered deep cuts in response to Russia’s refusal to cut exports to raise prices.
The move caused a major downturn in energy markets as prices fell to their lowest levels in several years, at a time when Saudi Arabia was displaying its financial strength to confirm that, in contrast to its competitors, it was able to bear low prices for years.
The market turmoil eventually led to Russia and other producers returning to the agreement, leading to a historic deal to cut production by about 10 million barrels per day in May and June.
However, crude oil prices continued to decline.
“The cost to the energy market was nearly two months of low oil prices, but with the biggest deal to cut production in history, Saudi Arabia won the oil price war,” said Chinaia Bianco, an expert on Gulf affairs at the Council of the European Council for International Relations.
“And there is a great danger that the deal is very weak and may be late, in the absence of an indication that oil prices will rise sustainably, Riyadh may have unleashed something that it cannot control”.
US crude prices briefly exited the positive red zone on Tuesday, but the meltdown confirms that the blow to the energy industry will be long-term.
US lawmakers blame Saudi Arabia as the collapse threatens to push American oil producers into bankruptcy.
US Senator Kevin Kramer said, “The large drop highlights the reason why Saudi Arabia should not be allowed to flood the market, especially given our low storage capacity”.
“Currently, the largest number of Saudi oil tankers in years are on our way to our shores,” he added.
In light of recent developments, I invite President Trump to prevent it from unloading its cargo in the United States”.
When asked about Kramer’s comment, Trump hinted Monday that he was considering the possibility of stopping Saudi crude oil shipments coming to his country.
“We definitely have a lot of oil,” he told reporters.
So I will look into that”.
Another US Senator James Anhoff went further, demanding tariffs on Saudi oil.
“It is clear that the Saudis and Russians continue to flood the global oil market in what I consider to be an attempt to crush American oil and gas producers and seize their market share,” Anhoff wrote in a letter to US Secretary of Commerce Wilbur Ross.
He continued, “I urge you… to impose customs duties on oil imported from Saudi Arabia and Russia, and to punish them for their destructive behavior”.
The Kingdom of Saudi Arabia ignored these statements, but confirmed on Tuesday that it was closely monitoring the conditions of the oil market and was ready to take any additional measures to find a balance, although it had previously announced that it was no longer ready to play the role of the “alternative product” that bore the burden of market stability.
Analysts say the collapse in prices will have wide-ranging consequences, from declining revenues in energy-dependent economies to causing a global downturn and hampering oil exploration projects.
The economic damage is evident in the Gulf countries, including Saudi Arabia, the largest oil exporter in the world, which collectively represents a fifth of the world’s crude supplies and where oil income accounts for 70 to 90 percent of public revenues.
These difficulties could undermine the ambitious economic reforms undertaken by Crown Prince Mohammed bin Salman, the de facto ruler of Saudi Arabia, to end the kingdom’s dependence on oil.
Riyadh has recorded a budget deficit every year since the last drop in oil prices in 2014, and it borrowed more than $ 100 billion and withdrew its reserves to cover the deficit.
Russia and Saudi Arabia have agreed to cut their production to 8.5 million barrels per day, but analysts say further cuts may be necessary if prices continue to collapse.
“Riyadh may now feel satisfied after it confirmed its will and strengthened its leadership of the global oil market… and made it clear to Moscow that Russian policy should be in line with the Saudi oil strategy in the future,” Bianco said.
“But the episode is not over, and the stakes are high for Saudi Arabia.
There may be a political price to be paid”.