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Monday, April 15, 2024

OPEC’s oil price strategy fails miserably: What’s next?

Saudi Arabia’s decision to launch an oil price war was viewed by OPEC as part powerplay, part brinkmanship by the world’s top oil exporter. But the high-stakes gamble could also damage Riyadh’s oil-dependent economy

Following Russia’s refusal to cut oil output faced with a coronavirus-fuelled slump in demand, its alliance with OPEC has been thrown into doubt, as has the cartel’s influence on prices.

The “OPEC+ alliance looks dead after OPEC failed to reach an agreement with Russia on further production cuts”, banking group ANZ said in a client note after Russia’s move Friday sent oil prices crashing.

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The losses widened massively on Monday after Saudi Arabia, the kingpin in the Organization of Petroleum Exporting Countries, responded with the biggest cuts to the kingdom’s prices in two decades, moving to snatch some of Russia’s market share.

That in turn sent world benchmark oil prices diving, with Brent North Sea and WTI each shedding 30 percent, before recovering slightly

“It looks like… we are in a completely different oil world than over the last three years, where OPEC+ regularly provided a floor to prices,” said analysts at JBC Energy.

Faced with a vertiginous collapse in crude prices beginning in 2014, OPEC members agreed in late 2016 with ten non-member oil-producing nations, including big player Russia, to limit output.

Read more: Oil wipes out markets as Saudi initiates price war

Back to the table?

But after Russia last week placed in serious doubt the future of OPEC+, analysts said Riyadh’s retaliatory move could be an attempt to get Moscow back to the negotiating table, even if they doubt it will happen.

JBC Energy said the recent meeting’s failure can be explained in particular by different expectations regarding prices — Russia seemingly satisfied with crude at $50 per barrel, while Saudis prefer $60-70.

“However, all oil producers will agree that $25 is not what they want,” JBC added

Following Monday’s slump, Brent was trading around $37 per barrel and WTI at about $34 — even this perhaps not a sufficent enough plunge to get Russia back onside.

“Russia is better prepared than previously,” said Chris Weafer, founder of Macro Advisory, which provides expert opinion on the country.

According to Weafer, Russia has significantly more financial reserves than Saudi and a fluctuating currency to cushion the impact on the nation’s budget, whereas the kingdom’s currency is pegged to the dollar.

Natixis analyst Joel Hancock said he thinks OPEC “may agree a cut without Russia” at a meeting in the coming months.

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As it stands, OPEC comprises 13 nations, together pumping out about 35 percent of world crude, more than one-third of which comes from Saudi Arabia.

Meanwhile the OPEC+ cuts to output since 2016 have been soaked up largely by Saudi as it sought to prop up oil prices and therefore its revenues — although a global economic slowdown and US production boom have offset gains.

With prices now tumbling however, American shale oil producers face being the real loser as their production costs tend to be higher than for the crude extracted by Saudi and Russia.

Read more: Coronavirus infects Oil, new countries

“This could be a chance to hit the US shale market which is short of cash anyway,” said John Hall at consultants Alfa Energy.

AFP with inputs from GVS News Desk