Saudi Arabia went to a price war with Russia in March 2020 after Russia refused to renew the deal to cut production (the OPEC+ deal) with further cuts to counter the crisis of demand shortage as a result of the decline in global consumption. Saudi Arabia resorted to dumping the market with crude oil to pressure all producers, particularly Russia. Capable of dealing with low oil prices for a limited period due to its need of a barrel price close to the 60-80 dollar level to support its economic plans, Saudi Arabia opted to pressure Russia which had claimed to be capable of accommodating oil prices close to 20 dollars for long periods. However, experience has demonstrated that Russia is incapable of going on after having suffered from low prices. US shale oil industry was also affected, which confirmed that the step of dumping the market was a negative one for all parties.
Eventually, a deal was announced on April 12th among the OPEC+ group for cutting oil production by 9.7 million barrels per day (which is the largest cut deal in OPEC’s history) starting from early May 2020.
On the other hand, the coronavirus crisis has severely affected the global economy which has entered a phase of slowdown and recession. The World Trade Organization has forecast a sharp decline in world trade this year by rates ranging between 13 and 32 percent. US agency Bloomberg has also forecast that the total financial losses to be sustained by the world economy will reach nearly 5 trillion US dollars within two years. Indexes of global exchanges have declined by nearly 25 percent compared to their values at the beginning of 2020. The market value of global energy companies and the size of their trade in global exchanges have also declined where the market value of British Petroleum now stands at half its value in January 2020. All this has contributed noticeably to the decline in demand for all energy types and is considered the main reason for the collapse of the prices of crude oil (Brent blend) from nearly 70 dollars per barrel in January 2020 to less than 20 dollars currently (see figure 1).
The limits of resilience of the OPEC+ deal in light of the current global economic crisis is doubtful given the conflicting policies and positions of the deal parties. Besides, the deal can hardly solve the price crisis if the other producers do not cooperate. Yet experience has demonstrated that the need by its parties and other producers for the deal exceeds their capability to give it up in light of the remarkable decline in demand which has already reflected on the orientations and positions of countries influencing the oil market to be able to match developments.
Map of countries influencing the oil price market
The main countries influencing the oil price market and the size of their current interactions can be explained as follows:
1- Major producers
In view of the major oil producing countries largely affecting prices, Annex 1 shows the top ten oil producing countries in 2019. The proportion of the share of the ten countries in global oil production is nearly 71 percent, which is quite a large proportion that makes those countries the main determinant of price trends based on the rates of rise and fall in production, stocks and reserves, as follows:
a- Traditional powers
It can be said that Saudi Arabia, Russia and the US are the countries with the greatest influence on the oil market, and their policies in the market are considered critical in determining the form and level of prices therein. Therefore, the review of the major market powers will focus on those countries, as follows:
b- New alliances
1- Major consumers
Annex 2 indicates the top oil consumers in 2019. Policies of major consumers can be analyzed as follows:
a- OECD countries: these account for more than 50 percent of global oil consumption. However, their consumption is not as high as that of countries outside the organization. Figure 4 shows the relationship between consumption change in OECD countries and the change in crude oil prices. The higher the consumption of OECD countries, the higher the prices, and vice versa.
b- Non-OECD countries: those countries record a significant increase in oil consumption. China, India and Saudi Arabia have recorded the highest growth in oil consumption among non-OECD countries. Figure 5 shows that the oil consumption of non-OECD countries increases with the increase in their economic growth rates.
Main determinants of policies of countries influencing the oil market
A number of essential determinants affect the policies of countries influencing the oil market. Those determinants are classified as follows:
1- Permanent determinants
a- Competition for market shares: ensuring the largest market share for every producing country is one of the main determinants of its oil policies. This drives them to start a price war or offer incentives and benefits to consumers to ensure access to new markets or preserve their shares in existing markets. Countries may have to lose already existing shares out of their desire to cut production to improve prices. Yet this entails the risk of the country being replaced by other producers in the markets, as was the case with Saudi Arabia. Figure 6 shows the development of the market shares of the world’s top three oil producers over the last four years. It shows a significant increase in the US market share compared to the dwindling share of Saudi Arabia, and to a lesser extent Russia, as a result of their engagement in a deal to cut production to improve prices. In addition, the Saudi share had decreased in October 2019 in the aftermath of the attacks on Saudi oil facilities.
b- Competition between different production patterns: the traditional low-cost production pattern is considered more efficient economically compared to the high-cost shale oil production pattern. However, developing extraction technology and its reduced cost have put pressure on traditional oil producers. Shale oil companies manage to profit at prices around 40 dollars per barrel. This has forced countries producing low-cost oil to cut production, particularly that they cannot afford low oil prices at the short to medium term due to their reliance on oil in their budgets. While most of those countries have tended to diversify their economies, oil continues to constitute the main pillar of those economies.
c- Growth rates of the global economy: with the improved conditions of the global economy, an increase takes place in company profits and demand for goods together with the rise in the prices of raw materials. Current oil consumption is primarily associated with economic activity. Furthermore, changes in projections of future economic conditions could also have an immediate impact on oil prices. Figure 7 shows the size of the correlation between global economic growth and the change in oil consumption and, therefore, the rise or fall in prices. The higher the economic growth, the higher the need for more oil consumption and thus the higher the demand, which leads to the recovery of prices, and vice versa.
d- Correlation with other commodity markets: Figure 8 shows the relationship between price changes of crude oil and other commodities. There is a positive relationship between the increase in demand for commodities such as gold, copper and wheat and the increase in demand for crude oil.
e- Change in the dollar exchange rate: considering that oil prices are based on US dollar, a fall in the dollar reduces the actual oil price outside the US. The decline in the dollar cost may lead to an increase in consumer demand for oil. This adds an upward pressure on prices as the fall in US dollar would decrease the actual profits of producers outside the US when converted to foreign currencies. In response, those countries aim to increase oil prices to maintain real revenues, budget levels and purchasing power in global markets.
f- Future demand levels and futures markets: trading in the market is not limited to current quantities as it also encompasses futures, that is the future delivery of oil and other energy derivatives. These markets play a role in influencing oil prices and policies of producing and consuming countries.
g- Percentage of oil contribution to the global energy mix: the increase in natural gas production in recent years has led to an increase in the global supply of liquids which led to a decline in its prices. This has allowed some countries to replace fossil fuel with natural gas in some economic activities. It is expected that the future proportion of natural gas in the global energy mix will increase with the tendency towards clean energy and eco-friendly industries. This will affect oil producers and their policies in determining prices globally.
h- Percentage of development of existing stocks: levels of physical stocks and price differences over time serve as a sign among current participants in the market with regard to prices. Lack of complete information on stocks creates further uncertainties in oil markets. Global oil stocks have increased as a result of the coronavirus crisis, to reach in late March 2020 nearly 1.7 billion barrels in available commercial and strategic storage, in addition to a floating storage (oil stored on tankers) perhaps capable of accommodating a further 130 million barrels.
2- Seasonal and contingent determinants
a- The coronavirus crisis and decline in demand: the spread of the coronavirus and its transformation into a pandemic have affected economic growth rates and global oil consumption. Many countries of the world face a disruption in economic activity, air traffic and transport since January 2020. This has had adverse implications for the oil market as global demand fell by 10 million barrels in March 2020. Figure 9 shows the percentage change in global oil consumption as a result of the coronavirus crisis where demand fell sharply during the first quarter of 2020.
b- Geopolitical and security changes leading to disruption of production: prices of crude oil and oil products are affected by events that could lead to a disruption of the flow of oil and products into the market, including geopolitical developments. A significant portion of the world’s crude oil is located in areas that have historically been subject to political disturbances or the disruption of their oil production due to political events. Many significant oil price shocks have concurrently taken place with troubles in supplies due to political events, including the attack on Saudi oil facilities in 2019. Market participants always assess the possibility of future troubles and their potential impact, in addition to the volume and duration of any potential disorder, the extent of the available crude stock and the capability by other producers to compensate for the potential loss in supply.
c- Climate changes such as hurricanes and other weather disorders may affect production processes and thus increase pressure on the markets and drive prices upwards.
Scenarios and future expectations
Under the present conditions of the oil market, which is characterized by a unique abundance in supply against a sharp decline in demand, future scenarios for policies of countries influencing the oil market can be divided into the following levels:
1- In terms of the future of the deal (policy) of production cuts: according to the deal, the reduction policy will continue until the first quarter of 2021. However, its impact on improving prices during the upcoming period is doubtful in light of the economic conditions resulting from the coronavirus crisis. The future of the deal is essentially the future of the OPEC+ alliance as well as the economic and political conditions that could create a new price war. The future of the production cut policy by the OPEC+ could develop according to one of the two following scenarios:
a- First scenario: continuation of the reduction policy due to its effectiveness or the need for more price improvement so that OPEC+ countries would respond to market changes by continuing the reduction beyond the first quarter of 2021.
b- Second scenario: the collapse of the deal due to the ineffectiveness of the reduction in containing the price fall as a result of the economic conditions that will stem from the coronavirus crisis or for fear of the continued loss of market shares.
The first scenario seems more plausible since Saudi Arabia’s victory in its oil war against Russia came after conviction by all parties that it would be difficult to maintain prices at 20 dollars per barrel as this would mean loss for all. In view of the continued decline in demand as a result of the increased economic implications of the coronavirus crisis, the inevitable supply cut in an attempt to improve prices will be the appropriate policy for all in the short to medium term pending getting rid of the consequences of the current economic crisis.
2- In terms of the future of the oil demand policy (consuming countries): as a result of the economic crisis stemming from the coronavirus epidemic, oil demand will obviously decline to record levels before it improves in case the crisis is over and economies return to normal operation. However, the present record storage levels in oil exporting countries and major industrialized countries will constitute the biggest obstacle to improved demand levels and consequently price levels. The G20 is likely to fill up strategic oil reserves in an attempt to enhance demand. While those measures may be well-founded, their impact on the market will be minimal.
3- In terms of the future of Saudi policy in the oil market: Saudi Arabia could afford a price war for a limited time. While it has at its disposal huge financial reserves of more than 500 billion dollars, it could experience a deficit of up to 140 billion dollars if oil prices remained at around 30 dollars per barrel, which would affect its future economic plans. Therefore, the option for Saudi Arabia will always be to improve prices at the short to medium term to range between 60 and 80 dollars, albeit at the expense of production cuts. Yet it will rely on the weapon of dumping the market if it finds itself the only advocate of the reduction policy as it will then lose its market shares.
4- In terms of the future of Russia’s policy in the oil market: while the Russian economy is more diversified, in addition to Russia’s possession of monetary reserves of nearly 570 billion dollars in its national wealth fund, and despite Russian announcements regarding its resilience for a period of between 6 and 10 years at prices of 25-30 dollars per barrel, experience has proved that it would be hard for Russia to continue with the policy of dumping the market as it will face a tough opponent (namely Saudi Arabia) who will dump the market in a way that would lead to a price collapse that cannot be afforded by the Russian economy. In addition, Saudi Arabia is capable of competing with Russia in its own traditional markets, which constitutes a serious threat to Russia. Therefore, Russian policy in the short run will tend to maintain the OPEC+ alliance. Yet it might revert to rejecting production cuts in case prices and the economy have improved after the coronavirus crisis in the medium to long term. This would mean the possibility of the outbreak of a new price war in light of Saudi Arabia’s insistence on reduction levels to maintain price levels.
5- In terms of the future of US policy in the oil market: while the fall in oil prices may constitute a fulfilment of an election promise by Trump to reduce gasoline prices, the negative impact on US shale oil companies, particularly in light of the declaration of bankruptcy by some, such as Whiting Petroleum, the largest producer of shale oil in North Dakota, and the possibility of a financial deficit as a result of government intervention to save the shale oil companies and structure their debts will make the US plan to sustain oil prices at a level above 43 dollars per barrel, which is the average price needed by shale oil companies to resume operation and restore millions of jobs, an objective badly sought by Trump as he approaches the upcoming elections.
6- Other oil countries, such as Bahrain, Oman, Iraq, Iran and Algeria, will also suffer badly in case oil prices fall to the levels of 20 dollars per barrel as they will experience serious financial deficits. That is why those countries will push for any policies leading to increasing prices.
Endnotes and sources
 OPEC and allies agree to historic 10 million barrel per day production cut, available at: https://www.cnbc.com/2020/04/09/oil-jumps-ahead-of-make-or-break-opec-meeting.html, access on: 18-4-2020.
 WHAT DRIVES CRUDE OIL PRICES?, available at: https://www.eia.gov/finance/markets/crudeoil/supply-opec.php, access on: 18-4-2020.
 Energy market turmoil deepens challenges for many major oil and gas exporters, available at: https://www.iea.org/articles/energy-market-turmoil-deepens-challenges-for-many-major-oil-and-gas-exporters, access on: 19-4-2020.
 Emergency Planning for OPEC States, available at: https://www.csis.org/analysis/emergency-planning-opec-states, access on: 15-4-2020.
 Saudi Arabia’s Radical New Oil Strategy, available at: https://www.project-syndicate.org/commentary/saudi-arabia-oil-production-mbs-new-strategy-by-bernard-haykel-2020-03, access on: 15-4-2020.
 OPEC+ Strikes a Deal, But Big Challenges to Come, available at: https://www.csis.org/analysis/opec-strikes-deal-big-challenge-come, access on: 19-4-2020.
 No winners, only strange bedfellows, from the new OPEC+ deal, available at: https://www.brookings.edu/blog/order-from-chaos/2020/04/14/no-winners-only-strange-bedfellows-from-the-new-opec-deal/, access on: 19-4-2020.
 Russia’s failed OPEC gamble, available at: https://www.iiss.org/blogs/analysis/2020/04/russia-opec-agreement, access on: 19-4-2020.
 The Oil Sector That Will Suffer The Most, available at: https://oilprice.com/Energy/Energy-General/The-Oil-Sector-That-Will-Suffer-The-Most.html, access on: 19-4-2020.
 Will the OPEC agreement work and, if so, how long will it last?, available at: https://thehill.com/opinion/energy-environment/492456-will-the-opec-agreement-work-and-if-so-how-long-will-it-last, access on: 19-4-2020.
 COVID-19 and the global economy: shutdown but not out?, available at: https://www.iiss.org/blogs/podcast/2020/04/covid19-and-the-global-economy-shutdown-but-not-out, access on: 19-4-2020.
 Is the Oil Market Crisis Over? Not at All, available at: https://www.csis.org/analysis/oil-market-crisis-over-not-all, access on: 19-4-2020.
 Oil’s Collapse Is Taking an Entire Service Industry down with it, https://www.bloomberg.com/news/articles/2020-04-16/oil-s-collapse-is-taking-an-entire-service-industry-down-with-it, access on: 19-4-2020.
 Oil Storage Nears Its Limit, available at: https://oilprice.com/Energy/Energy-General/Oil-Storage-Nears-Its-Limit.html, access on: 19-4-2020.
 Just How Big Is the Biggest-Ever Slump in World Oil Demand?, available at: https://www.bloomberg.com/news/articles/2020-04-17/just-how-big-is-the-biggest-ever-slump-in-world-oil-demand, access on: 19-4-2020.
 Real Oil Market Is Sinking and OPEC+ Deal Can’t Rescue It, available at: https://www.bloomberg.com/news/articles/2020-04-15/the-real-oil-market-is-drowning-and-opec-deal-can-t-rescue-it, access on: 19-4-2020.
 Russia and Saudi Arabia Consider Even Deeper Oil Output Cuts, available at: https://oilprice.com/Energy/Crude-Oil/Russia-And-Saudi-Arabia-Consider-Even-Deeper-Oil-Output-Cuts.html, access on: 19-4-2020.
Zeinab F. Shuker | 21 Jan 2021
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