March 31, 2020

World markets are still jeopardized by the consequences of quick downsize of oil prices, as the result of failed negotiations between the Russian Federation and OPEC+ partners and following decision of Saudi Arabia government to decrease oil prices and to increase amounts of oil mining alongside with solid bonuses for suppliers of Saudi oil. On March 9, the April futures price for 1 barrel of WTI oil fell to $31.34, and it insufficiently increased to $33.27 on March 10. Apparently ruble’s rate of exchange also decreased to 72.4 rubles for $1.
Such a sharp reduction of oil prices is extremely undesirable for the Russian economy, because 38–40% of its economy is associated with oil production, refining and marketing of petroleum products. The oil price set in the Russian budget is $42 per barrel. The current drop has already caused a significant deficit in budget execution, since it is unlikely that the oil price will quickly return to its previous values under the current policy of the Saudi authorities, which are going to continue the intervention into the oil market.
The cost of Saudi Arab Light brand oil is up to $9 per barrel, which leaves the Saudi oil monopolist Saudi Aramco a significant room for maneuver, while even the current decline of oil prices on the world market creates a significant deficit in the state budget of the Russian Federation. Russia supplies European buyers mainly Urals brand oil of much lower quality than the Saudi Arab Light. Therefore, further intervention of Saudi oil on the European markets will create significant problems for the sale of Russian oil under futures contracts — the worst in quality and requiring additional processing Russian Urals will cost more than a better Saudi Arab Light.
The position of Saudi Arabia looks quite serious, because the oil-producing capacities of the kingdom make it possible to raise production to 13 million barrels per day against the current 9.5 million barrels. Russia has a production reserve to a maximum of 0.5 million barrels. The current situation will allow the Saudis to increase the volume of oil offered for sale by 4–5 times (applying discounts and bonuses to the already low price) in order to force Russia to return to negotiations on lowering oil production, but in other proportions — less comfortable for Russia than at the time of the collapse of the transaction with OPEC +.
However, there is another danger that is not related to market relations and pricing in the energy market — the Russian leadership can sharply aggravate the situation in the Middle East, and not only on the basis of its own considerations. So, Iran, being the most important oil exporter, has already protested in connection with the failed negotiations within the framework of OPEC+. Current drop in oil prices is perhaps even more noticeable for Tehran than for Moscow, since the sanctions imposed on Iran complicate the oil trade even at relatively high prices.
Now, the rapid decline in prices has aggravated Iran’s difficult enough position in implementing the state budget and financing expensive foreign policy initiatives (from supporting the Hezbollah movement in Lebanon to financing Shiite armed forces in Syria and Iraq).
The interests of Russia and Iran may coincide: it is extremely important for them that the price of oil remains consistently high. Unfortunately, the need to increase the oil price at any cost can provoke an escalation of violence in Syria, Libya, Egypt (the Suez Canal is an important artery for transporting oil), as well as in Yemen, where Iran traditionally supports the Hussite movement hostile to Saudi Arabia.
It is highly likely that Saudi government, even being well aware of the geopolitical threats that have arisen, will continue to intervene into the oil market, keeping declining the oil price (probably, the current price is not the limit).

Facebook Comments

Add comment

Your email address will not be published.

Connect with Facebook

This site uses Akismet to reduce spam. Learn how your comment data is processed.