The collapse of the OPEC + agreement, coupled with a drop in demand amid the raging coronavirus pandemic, sent tectonic shocks to the global oil and gas markets. At the same time, attacks on the Nord Stream-2 pipeline project have intensified again.
World demand for oil had started to decline long before negotiations began on the possibility of extending OPEC + to Vienna in early March. This drop is due to the pandemic and the warm winter. During the Vienna talks, Riyadh issued an “ultimatum-type request” for a dramatic reduction in oil production, which was unacceptable to many supplier countries because of the risk of losing their market share. Meanwhile, the accusations by Saudi and Western politicians and the media that accuse Moscow of triggering the OPEC + failure are baseless. Cartel agreements naturally lose their attractiveness over time, because “each participant tends to deceive the others”. Another major flaw in OPEC + is that there are no US oil companies among its signatories. As a result, the reduction in oil production from OPEC + countries has increased the market share of American producers.
In response to the OPEC + fiasco, Saudi Arabia (KSA) announced its intention to “overwhelm the market” by increasing production by 25%. Riyadh launched a price war in the hope of “regaining the lost market share”. The KSA lowered the oil prices it was offering for April from $ 5 to $ 8 a barrel in an effort to put pressure on Russia and “other producers, who are not members of OPEC, including the United States ”. A number of Gulf countries have also announced increased production. As a result, by the end of March, oil prices had reached an 18-year low, with the Russian Urals reaching less than $ 15 a barrel. If the price war were to intensify, the price of the Urals could fall to 5-8 dollars.
Observers offer various comments on Riyadh’s reasons for doing so. From purely tactical considerations – “forcing Moscow to return to the negotiating table”, in the long term, aimed at redesigning the entire oil and gas market, including the destabilization of the oil industry of competing countries, first of all Russia and the United States. It could even be an attempt to undermine the social and political stability of the economies that depend on oil and gas exports.
The main advantages of the Saudis include, first of all, the lowest cost of production, huge oil reserves, substantial state reserves of more than $ 0.5 trillion, and unlimited possibilities for foreign lending. At the same time, according to experts, “the Saudi economy is mired in debt.” If it is to maintain a deficit-free budget, Riyadh should keep prices as low as $ 80 a barrel. According to IMF experts, even a return to the “rate of 50-55 dollars per barrel” will not be enough for the KSA.
By 2024, Saudi Arabia may face a balance of payments crisis and may choose not to link the rial to the dollar. Meanwhile, on March 27, the Wall-Street Journal reported massive refusals by consumers in Europe and North America to accept new shipments of Saudi oil because “there is nowhere to store it.” more ”.
The dramatic drop in oil prices has severely affected the US oil sector, while fears of massive bankruptcies in the US shale oil production sector are mounting. Regular suppliers are preparing to drastically reduce investments and supplies.
The “shale boom” allowed America to overtake Saudi Arabia and Russia in 2018 and become the world’s largest oil producer. Unlike what was happening before, while cheap oil was still part of the US economy, the situation has changed dramatically. Under the conditions of the coronavirus pandemic, it is unlikely that the money saved by gasoline consumers will stimulate demand in other sectors of the economy. What will also be damaged is the shale oil sector on which a number of American states depend. The breakeven point for shale oil companies, according to The Economist, ranges from $ 23 to $ 75 per barrel, depending on the oil basin. The collapse in prices is fraught with massive layoffs – in the middle of the presidential election.
Meanwhile, shale oil producers experienced increasing difficulties even before the current price war started. In recent years, many companies have reported only losses on their balance sheets. Investors have turned away from shale, most companies have found it almost impossible to take out new loans or refinance old ones. Now, given the dramatically changing situation in the oil market, many shale producers may see recovery by larger players as the “best” option.
The collapse in oil prices has struck an equally devastating blow to the geopolitical plans of American leaders. As dependence on oil imports diminished, Washington became increasingly confident that the United States would now be able, through sanctions, to completely stop oil exports from Venezuela and the United States. Without fear of uncontrolled global destabilization. A number of experts in Russia fear that the growth of production and export capacities in the LNG and shale oil sectors, according to the current standard scheme, could encourage Washington to “toughen the sanctions” against the industry Russian oil and gas.
In the summer of 2017, President Trump announced his intention to secure a dominant US position in the global gas market. An energy strategy that also emerged at the time “describes Russia as a competitor”, saying that “Russian plans to diversify supply routes to Europe go against American policy”. The result of these political approaches is a “concerted effort … against Nord Stream-2 (NS-2)” and other Russian projects on the construction of new pipelines to Europe.
In the end of 2017, the United States, for the first time in 60 years, began to export more gas than it imported. Growing shale production allowed the U.S. to produce 733 billion cubic meters by the end of 2017 – more than anywhere else in the world, including Russia. However, until recently, one of the main obstacles to expanding US gas exports was the US dependence on oil imports. Oil on the American domestic market is several times more expensive than gas in energy equivalent. If the United States wants to increase the supply of its “cheap” gas – to make up for the shortage of oil and gas on the domestic market – it should increase imports of “expensive” oil.
Another deterrent is competition from Russia. American LNG is more expensive than the Russian gas pipeline. As a result, in 2017, the gas supply from the United States to Europe amounted to no more than 3 billion cubic meters of gas. At the same time, gas consumption in Europe last year reached 500 billion cubic meters. In order to reverse the trend, in the same year 2017, the US Congress voted in favor of a set of sanctions that would “threaten the construction of any new gas pipeline” in Europe with the participation of Russia. In general, it was supposed to launch authorized weapons against Moscow by the time LNG production in the United States reaches full capacity – by 2020-2022. On December 21, 2019, when the United States imposed sanctions on companies engaged in the installation of NS-2, foreign contractors suspended all operations.
It can only be ruled out if and when the EU considers American LNG as a good alternative to Russian gas, Brussels could choose to exchange restrictions on gas supplies from Russia to Europe. The political will to “pay extra for energy security” is also present in a number of European countries. Another scenario could include an American attempt to force a price war on Moscow, to guarantee dumping in the European direction. In this case, Nord Stream-2 will fall not only under political pressure, but also under direct financial pressure. But is it hard to imagine how the American authorities will convince their electrical engineers to supply Europe at a loss?
Meanwhile, the long-term strategy of the United States, according to several Russian analysts, is not limited to the struggle for the gas market, but to its transformation by analogy with the oil market. If it were possible to block the maximum number of existing and under construction pipelines, the lion’s share of the world’s gas would go by sea in the form of LNG. This would help “untie” petroleum gas prices and transform the international gas market into a single, global and punctual market where transactions are quick and made in US dollars to minimize costs and risks. Thus, the main objective of the hype around the “shale revolution” and the “capture of the world gas market” is to keep the world oil and gas market tied to the US dollar.
The price war declared by Saudi Arabia could put an end to these plans. The fact that the situation in the United States has reached a critical point is clear from recent Washington statements. According to the American media, on March 26, the American secretary of state called on Saudi Arabia to “stop the price war with Russia”. Texas shale producers urged state officials to “consider cutting back on oil production … due to declining demand.” On March 30, on the initiative of the White House, there was a telephone conversation between Vladimir Putin and Donald Trump. The two sides agreed to hold “Russian-American consultations” “on the current state of the world oil market” “at the level of energy ministers”. The markets took the news with some hope of reaching a global agreement on the regulation of oil production between Moscow, Washington and Riyadh.
Europe, if the Nord Stream 2 project is blocked again, risks becoming hostage to Washington’s geopolitical ambitions, with its declarations on the intention to fill the market with its LNG. But this can undermine Germany’s economic leadership and, consequently, the policy of strengthening the unity of the EU. Finally, if, after all the current cataclysms, the European Union is still adamant in the fight for energy independence, it will have to think about how to reduce the share of international trade in raw materials in dollars. In September 2018, the head of the European Commission at the time, Jean-Claude Juncker, said that it was “absurd” for the EU to pay 80% of its energy imports in dollars, considering that these imports are estimated at 300 billion euros per year. And this despite the fact that only 2% of European energy imports come from the United States.
Rumors circulating in the oil market relate to the possibility of backstage agreements between the United States and Saudi Arabia, which will be directed against Moscow. At the same time, writes the Financial Times, “the main Russian oil companies are likely to survive a drop in oil prices over the next two years, given the advantages they have over their foreign competitors.” For example, Russian oil companies will remain profitable even at a price of $ 15 a barrel.
Significantly, the ability of the Russian energy complex to effectively resist price fluctuations is largely the result of Western sanctions. For example, “a large part of the costs and debts” of Russian oil companies is denominated in rubles. At the same time, the ruble exchange rate is free, “floating”, while the currencies of the KSA and the United Arab Emirates are closely linked to the dollar. The fall in the ruble leads to an increase in export earnings. The Russian tax system reacts flexibly to the fall in oil prices. Finally, “the country’s oil companies have accumulated large foreign exchange reserves in recent years.”
Russia’s positions in the European gas market also remain solid. Despite the year-on-year increase in political pressure and sanctions, as well as the drop in contract prices, Russia represents a third of the European market. Russian leaders, as well as Gazprom, have repeatedly stressed their commitment to complete the Nord Stream 2. Russia’s energy strategy until 2035 provides for the gradual development of new projects in the LNG sector, where world trade is expected reach 70.% by 2040.
Thus, the current state of the world oil and gas market is determined by three key factors: the price war, the coronavirus pandemic and, therefore, an excess supply of oil. In addition, the situation of the world economy could beat the sad “records” of the 2008-2009 crisis. The Xinhua News Agency estimates that the whole world is “in survival mode”. In such circumstances, each of the supplier countries is faced with a dilemma: fighting for a larger market share in the hope of beating competitors, or trying to coordinate efforts to stabilize prices. It seems that the struggle for exhaustion is the last thing the world community needs now. For this reason, Moscow calls for dialogue and a return to constructive cooperation, which is based on an in-depth analysis of the long-term consequences of the decisions taken.
From our partner International Affairs