Saudi Arabia, in Move Aimed at Russia, Cuts Oil Prices and May Raise Production – The New York Times, Nytimes.com
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The action comes after Russia on Friday rejected an agreement with OPEC on cuts in oil supplies to bolster prices.
Saudi Aramco’s Ras Tanura oil refinery and oil terminal. Shares of Saudi Aramco fell on Sunday below their initial public offering price for the first time.Credit …(Ahmed Jadallah / Reuters
For Saudi Arabia, cooperation with Russia had reinforced OPEC’s clout at a time it is being threatened by the recent surge in American oil production that has turned the United States into a major crude exporter for the first time in decades. “Saudi Arabia is protecting its market position in the face of a collapse in oil demand, a shrinking physical market and greatly reduced prices, ”said Sadad al-Husseini, a former executive vice president of Saudi Aramco. He argued that both Russia and Saudi Arabia would “come out of this down cycle as stronger players, while shale oil, oil sands and other costly or politically unstable producers struggle for financing.”
But their success is far from certain.
The last time Saudi Arabia and other OPEC members allowed global supplies to rise in the face of increasing volumes of oil from shale producers in the United States was in late , and prices plummeted to below $ a barrel. Two years later, Russia joined with OPEC in a production pact that has helped prop up prices for the last three years by coordinating cuts in output.
(But OPEC’s intention in) of undercutting American and other producers backfired and reduced its share of the market. American oil companies managed to increase production anyway, as they became more efficient at drilling through shale and investors continued to pour money into their enterprises. This time may be different, though, because Wall Street has grown tired of sluggish oil investment returns and the high debts of many small and medium-size companies.
At the meetings at OPEC’s headquarters in Vienna last week, Russia declined to go along with a Saudi-led proposal to cut 1.5 million barrels a day, or around 1.5 percent of global supply, to deal with plunging demand because of the spreading coronavirus epidemic. The two sides also failed to agree on an extension of existing cuts of 2.1 million barrels a day. That failure opens the way for increases by those producers that do have additional capacity.
“If you are Russia, it’s worth it for you to take a three-month price hit to see if you can knock out US oil exports, ”said Amy Myers Jaffe, an oil and Middle East expert at the Council on Foreign Relations. “They might be correct for three months but the shale never gets destroyed.”
She said that the divergence in Saudi and Russian strategies “signals that the relationship between Saudi Arabia and Russia is on the skids.” In a report published last month, the International Energy Agency, the Paris-based monitoring group, said the Saudis could produce more than 2 million barrels a day more while the United Arab Emirates, Kuwait and Iraq could add roughly 1 million barrels a day between them. Falling prices are a huge problem for Saudi Arabia and other oil-dependent nations. Low prices erode the petroleum revenues that sustain the government budgets of these countries. Krane, a Persian Gulf analyst at Rice University’s Baker Institute, said that oil prices were already well below the $ 90 – a-barrel level that the Saudis need to finance government spending. A weakened Aramco share price could be a blow to the prestige of the country’s crucial decision maker, Crown Prince Mohammed bin Salman. He led the campaign to bring Aramco to the public markets, and many Saudis bought shares. The crown prince’s ambitious and expensive economic development program, known as Vision , could also be in trouble, Mr. Krane said, if oil producers open the taps and beat down prices. “A price war would cause the Saudis to put the entire Vision 01575879 diversification plan on hold, while the kingdom hunkers down on austerity wages, ” Mr. Krane said.
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