In the last couple of months, we have witnessed the greatest fall in the crude oil prices in history ever. Recently the crude oil price dropped down to the negative territory (-$37/bbl), means traders were ready up to sell their oil commodities at a loss. But how it all happened and what were the reasons behind it? – Russia-Saudi Oil Price War
Oil Price War Explained
Well, it all started with the Russia-Saudi oil price war 2020. Behind this was an effective collapse of an agreement between OPEC and Russia to enact production cuts to support the market. Saudi Arabia, OPEC’s de facto leader, wanted deeper and more prolonged cuts to counter the effect of the spread of coronavirus on demand. The International energy agency said that oil consumption is expected to contract this year by 1.5 million barrels per day for the first time since 2009.
Despite this Russia refused the OPEC decision, believing the bigger cuts in production would only propel rival US shale producers. In response, on 8 March 2020, Saudi Arabia launched an oil price war after Russia deal to collapse. Even as the world requires less oil from global producers, the kingdom said it would put 2.6 million barrels a day into the oil market. This triggered a tit-for-tat response from rivals. Russia said it would add more oil into the market and so did the UAE. The UAE announced an increase in production to 4 million barrels per day, higher than the country’s estimated output capacity of 3.5 million bpd.
Aftermath
It’s the first time since the 1930s that we’re seeing such a severe demand shock now combined with a supply shock facilitating 65% quarterly fall in the price of oil. Since the beginning of the price war consumption fell drastically due to depressed demand and insufficient storage mainly because of coronavirus pandemic.
Saudi Aramco announced a cut in capital expenditures from $35–40 billion planned to $25–30 billion. Iraqi and Kuwaiti oil producers also announced price discounts to their buyers, though Iraq’s discount was lower than that of Saudi Arabia’s. The US-based company, Whiting Petroleum Corporation, which produced 120,000 barrels per day, was the first major producer to declare bankruptcy due to the oil price crash. The oil price war is one of the major causes and effects of the currently ongoing global stock-market crash. Norway, Europe’s largest oil exporter, saw a drop in its currency to historic lows against the Euro (source).
In terms of India…
World Bank says Remittances will plunge by more $100bn. This will bite hard as FDI is set to fall 35%, equity & debt flows are expected to fall 80% to low and middle-income countries. India will be hit too especially with flows from the Gulf drying up. India’s remittances are estimated to fall ~23% to $64 bn in 2020.
However, in Russia Saudi oil price war, India can be a big winner by taking advantage of the fall in oil prices and can stock its reserves. India has a storage capacity of 39 million barrels, China’s total capacity is at 550 million barrels and Japan’s at 528 million barrels, ensuring a supply of over 190 days in the event of a supply disruption. If India can increase its storage capacity, then it can be a very good deal for India.
One more advantage Indian Markets can demonstrate i.e, in the area of Bonds. Still, compared to the Global Markets, Bond yield in India is comparatively attractive. With TLTRO 2.0, Corporates like RIL, NHPC have started issuing bonds. This can be an attractive opportunity for FIIs to capitalize.
On 9 April, OPEC and Russia’s historic deal marks the end of the oil price war by agreeing to reduce the oil production by 10 million BPD to boost the price and let the market forces get stable.
In future, the crude oil prices are expected to make more new lows as long as this global pandemic continues.
