Saudi Arabia and Russia lock horns as oil prices crash

Oil Prices Crash

Oil prices have witnessed their largest drop since 1991. The horns of global oil-producing giants Saudi Arabia and Russia have abruptly locked.

Oil prices collapsed overnight at unprecedented levels after Saudi Arabia launched a price war against OPEC renegade Russia.

Saudi Arabia’s favourable geography allows it to turn on and off its oil supply with ease. Giving them a distinct advantage over fellow oil-producing nations in terms of reactivity.

As a result of Saudi’s intention to flood the market, US oil prices crashed by 34% reaching four-year lows of $27.43 per barrel. Meanwhile, Brent crude the global benchmark fell by 26% to $33.49.

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Given the interconnectedness of oil and the global economy, it came as no surprise that markets also felt the brunt of Saudi Arabia’s decision.

Markets are already in a state of flux as a result of the ongoing coronavirus situation.

OPEC and Russia have always held an imperfect relationship. Fortunately, it was historically propped up by mutual interest in the stability of oil prices. Since 2017 Russia and OPEC have controlled supply to maintain a favourable price level for both parties.

Last week at an OPEC meeting in Vienna, Russia refused to lower production in order to prop up oil prices – due to a lull in demand caused by coronavirus’ impact on the global economy. Due to the breakdown in cooperation, Saudi Arabia has moved to flood the market in order to recapture market share.

Saudi Arabia is able to do this due to the geography of its oil fields and lower cost of extraction.

 

Impact on US shale-oil production

This is also bad news for US shale oil producers who are being driven out of the market. Whilst Saudi Arabia’s oil fields can be turned on like a tap, US shale fields often require months of planning. Shale production is also far more expensive to extract and refine, further adding to the cost.

The 2014-2016 oil crash did cause the US shale industry to teeter towards collapse. However, subsequent increases in prices have further developed the research and efficiency of shale making it more price competitive.

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