The recent deal between the world’s major oil producers has ended a crisis within the energy markets that had required the intervention of US President Donald Trump to stop what has been known as the war of production and prices between Saudi Arabia and Russia. The crisis has led to a decline of 40 percent in oil prices since the beginning of March 2020 when Saudi Arabia and Russia failed to reach an agreement on an emergency plan to deal with the abundance of supplies within the OPEC+ group.
While this war appeared as an output of the divergent views of both Moscow and Riyadh vis-à-vis the oil sector and the conflicting interests of the two countries against the slowdown of economic activity as a result of the corona pandemic, the US shale oil industry was directly affected. This prompted the White House to view the crisis not as a casual event but rather as a threat to hundreds of thousands of jobs within this promising US sector in the energy industry. It would also have disquieting implications for Trump’s campaign for the presidential elections next November.
Old players and new understandings
The intervention of the US President and the communications between Russian President Vladimir Putin and both President Trump and Saudi Crown Prince Mohammed bin Salman have resulted in building understandings on 12 April to re-adjust oil prices. The White House intervention has managed to produce a settlement whereby Mexico would be committed to those understandings. Under the deal, Mexico would cut its production by 100 thousand barrels per day, i.e. less than the commitment of 250-300 thousand barrels a day demanded by Saudi Arabia.
As a result of the understanding reached, 23 countries would commit themselves to withholding 9.7 million barrels of oil per day from global markets. The deal, which seeks to deal with increasing oil abundance as a result of the declining demand due to the corona crisis, aims to withhold from the markets a record quantity of crude oil estimated at more than 13 percent of global production.
The deal represents a loss of President Putin’s bet on achieving an opportunistic breakthrough in favour of the Russian oil industry within markets, be this through tempting with the abundant Russian production and the takeover of more markets where producing countries, including Saudi Arabia, are traditionally active, or through aiming a painful blow to the US shale oil industry which has become a well-developed partner competing with major countries producing traditional oil.
While some oil market observers, especially in the US, have argued that Riyadh is a partner of Moscow in dumping markets by entering the production war against Russia, some US legislators have launched a campaign against Riyadh accusing it of failing to respect decades of historical alliance with Washington (for instance, Republican Senator for North Dakota Kevin Cramer said, “that's not how friends treat friends”). However, experts on energy affairs consider that Saudi Arabia has dealt with the US shale oil industry as a reality that it has coexisted with and that it has been keen over recent years to defend a point of equilibrium in oil prices that would protect the interests of the Saudi oil industry while not leading to a great harm to the US shale oil industry.
The experts conclude that Saudi Arabia has gone too far in responding to Russia’s position which has refused a deal to cut production within OPEC+ at the beginning of March 2020 when it increased its production to 13 million barrels per day despite the resulting significant fall in prices. They also conclude that the Saudi decision was the only weapon to defend Saudi Arabia’s historical shares in consumption markets on the one hand, and to exert maximum pressure on Russia on the other. This facilitated Trump’s attempts to drive Putin once again into striking a deal.
Dimensions and implications of the deal
The deal was struck over a hurried videoconference with delegations from the 13 OPEC countries and others, including Russia, on the eve of the of start of dealings on Monday, 13 April, at a time of prevailing concerns about a possible huge collapse in prices if a deal cannot be reached. The severity of the crisis has apparently shocked all oil producers in the world, especially major ones, driving Russia and Saudi Arabia to agree once again and resume the use of expressions of cooperation and friendship between both countries, although the crisis will have adverse effects on the aspirations to build strategic relations between both countries, something which Moscow particularly needs to support its ongoing efforts to restore its influence in the Middle East.
Producers have managed to reach an agreement whereby they would rely on floating the price of the barrel of oil in proportion to spending requirements in both Russia and Saudi Arabia. Besides, the severity of the crisis and the accompanying political and economic tension have contributed to restoring the spirit of consensus and rules to adjust production. This facilitated agreement by producers to withhold greater quantities than was demanded by Riyadh, according to Saudi oil minister Prince Abdulaziz bin Salman.
However, the biggest winner of this deal is President Trump who has proved that he is capable of solving a complicated and multilateral crisis. This has re-positioned him as an international leader and a reference for solving global crises. It has also proved his capability to defend the shale oil sector in his country. That is why he was quick to boast about what has been achieved through his Twitter account, saying that the deal “will save hundreds of thousands of energy jobs in the United States” and demonstrating his capability to invest the event to influence voters in preparation for the presidential elections next autumn.
According to some experts, industrial countries, which are members of the International Energy Agency, are relied upon to announce the purchase of the crude to fill their national stocks as a way of withdrawing the oil surplus from the market, given that the deal takes into account that the procedures generally, in association with the current sanctions on Iran and Venezuela and the interruption of supplies from hot areas, such as Libya, could withhold 20 million barrels per day of supplies from the market.
Nevertheless, investors continue to express doubts that the cuts would be sufficient to support the rise in prices in the coming weeks. Global lockdowns lead to reduced demand for gasoline, diesel and jet fuel. While a view prevails that the deal and production restrictions therein will ease the depressive state in the oil markets, according to another view, this would be too little too late, especially that it is expected, amidst travel restrictions and suspension of work, that consumption will fall by nearly 30 million barrels per day this month.
• The deal between OPEC and its partners has demonstrated the continuing cooperation between countries under an international order that continues to operate according to the same rules. This denies what some foresee as the emergence of a new world order due to the discrepancies and conflicts of interest within the current world scene as a result of the corona pandemic.
• The deal has reaffirmed the US world leadership through sponsoring a deal that is simultaneously important for both its allies (such as Saudi Arabia and Mexico) and its rivals (such as China and Russia).
• The oil market crisis and the recent deal have highlighted the pivotal role of Saudi Arabia in determining the orientations and paths of this market in addition to Riyadh’s capability to hold critical pressure cards that are heeded by major powers such as the US and Russia.
• The recent oil crisis has constituted a remarkable failure for the Russian President’s policies and his approaches to international and regional changes. On the one hand, the oil war with Saudi Arabia has constituted a blow to Putin’s plans to win over US allies, especially in the Gulf, similar to what he achieved with Turkish President Recep Tayyip Erdogan, and has resulted in a setback within the context of Russian-Saudi relations. On the other hand, the crisis has damaged Putin’s image as he failed to present himself as an influential world leader and had to “give in” to the pressures from Riyadh and Washington and accept an oil production that he had previously adamantly refused. This would certainly affect his subsequent aspirations in the regional and international arenas alike.
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