Report

Russia’s Defiance Sets the Stage for Oil Price ‘Bloodbath’

Moscow rejects OPEC’s effort to avert a coronavirus-driven price collapse, shutting down an agreement to cut crude output.

Russian President Vladimir Putin and Igor Sechin of Rosneft
Russian President Vladimir Putin publicly supported cooperation with OPEC, even as Russian oil executives like Igor Sechin of Rosneft, seen here at left on Jan. 25, 2017, balked at production curbs. Alexander Nemenov/AFP/Getty Images

Russia surprisingly torpedoed an attempt by big oil producers to cut crude output and stabilize the market, sending the price of oil sharply down on Friday.

Saudi Arabia and other big oil exporters that make up OPEC had agreed on Thursday to further cut their oil output by 1.5 million barrels a day, a desperate attempt to shore up the price of oil as the new coronavirus wreaks havoc on the global economy. But that agreement was conditional on the support of Russia—which ultimately balked, ending the two-day OPEC meeting in Vienna with no new agreement and sending crude prices into freefall.

“It’s time for a good old-fashioned bloodbath, for which Russia deserves all the blame,” said Matt Reed, the vice president at Foreign Reports, an energy consultancy.

The bloodbath came on Monday as oil prices plunged by more than 20 percent to the low $30s per barrel after Saudi Arabia declared an all-out price war by sharply cutting the selling price of its crude. The combination of massive oversupply and shrinking demand from the impact of the coronavirus has “no equal in oil market history,” said Fatih Birol, the executive director of the International Energy Agency. The IEA slashed its forecast for global oil demand this year, and said that in a worst-case scenario the economic impacts from the spread of Covid-19 could mean the world consumes 700,000 fewer barrels per day of oil this year–a historic drop in consumption.

OPEC had planned to make more cuts now and to extend the big production cuts they’d made last year, which are set to expire at the end of this month. After the collapse of talks on Friday, it’s not even clear if those previous cuts will remain in place, which could lead to a tsunami of oil production that will add more barrels to the market right when they are least needed. Oil demand in the first half of this year is projected to shrink the most in a decade as the virus outbreak hammers economic activity (and demand for oil) all around the world.

Crude prices plummeted by about 8 percent in both New York and London to levels not seen since 2017—and most analysts expect the breakdown of the three-year-old cooperation pact between OPEC and Russia will only send oil prices lower. That will mean plenty of budget pain for all the major producers that staggered out of Vienna, and especially for U.S. shale oil producers already struggling with low prices.

Friday’s collapse was a stunning setback for OPEC, which has since 2016 aggressively managed the supply of oil to keep prices from falling too far as extra supplies from the booming U.S. oil patch threatened to flood the market. Since 2017, OPEC has cooperated informally with Russia, one of the world’s three biggest oil producers alongside the United States and Saudi Arabia, to coordinate production cuts and share the economic pain of pumping fewer barrels of oil.

Russia, which isn’t formally a member of OPEC, nevertheless managed to scupper the cartel’s efforts to deal with the collapse in oil demand and falling prices. While Saudi Arabia has already cut production in recent months, and OPEC was prepared to cut a further 1 million barrels a day if Russia made cuts of its own, the big OPEC producers were not willing to unilaterally make bigger sacrifices to shore up the oil market unless Russia shared the effort.

“The Saudis weren’t going to jump on this grenade alone, or with a small group of reliable Gulf Cooperation Council producers,” Reed said. “‘We all sacrifice, or we all suffer,’ is their thinking.”

Russia and OPEC agreed to continue consulting on oil supplies, but it’s not clear when they will meet again. Russian Energy Minister Alexander Novak said that countries in OPEC+, the broader grouping of OPEC plus Russia and some other producers, are free to pump with abandon next month.

Even though prices are low, individual oil producers have an incentive to pump more oil, hoping that higher volumes will help offset the lower prices. But when all big producers try to pump their way out of lower prices, it just makes things worse for everyone.

While Russia had been reluctant to make production cuts at this week’s meeting, most observers expected that OPEC and Russia would reach a deal in the end, if only because of the sheer magnitude of the economic damage being wrought by the coronavirus. Moscow put those lingering hopes to rest Friday, and with them the three-plus years of cooperation with OPEC that had restored those big oil producers to their traditional role as arbiters of the world’s most important commodity market.

“Russia decided the needed cuts were just too big and didn’t want to start down that road,” said Bob McNally, the president of Rapidan Energy Group, an energy consultancy. “They think they can live with the lesser evil of lower prices. We’re going to test that.”

Lower prices will also test Saudi leadership and Saudi Aramco—the largest oil company in the world just debuted on the stock market and was hoping for higher oil prices to boost its profitability and share price.

But some of the biggest losers from the debacle in Vienna are undoubtedly U.S. shale oil producers, which generally need oil prices above $50 a barrel to make any money—and which were ironically hoping their OPEC rivals would make production cuts that would help keep shale’s head above water.

After the meeting’s collapse on Friday, U.S. crude prices fell to $42 a barrel, and they could keep falling. Share prices in U.S. shale companies fell sharply Friday after the OPEC meeting collapsed without an agreement.

This article was updated Mar. 9, 2020 to reflect market carnage.

Keith Johnson is a senior staff writer at Foreign Policy. Twitter: @KFJ_FP

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