Russia caught the world by surprise last week after it decided not to cut its oil production as per OPEC’s resolution in Vienna. OPEC members called for a reduction of production to curb oversupply in the wake if the COVID-19 outbreak that has affected demand.
Russia refuses to cut oil production prompts Saudi Arabia to increase its production
The move by Russia of blowing the alliance with OPEC targets the US oil companies that depend on high prices in a sea of crude oil. Moscow is willing to sacrifice its economy so that it can gain a geopolitical advantage over the US. Putin is focused on winning market share from US oil companies whose debt-based growth caused Moscow to lose its dominance as the largest oil producer in 2018.
Saudi Arabia took an unprecedented move to slash oil prices as a response to Moscow’s actions. Oil prices plunged on Monday as a result of US crude plummeting 26% to four year-low of $31.13 per barrel and the worst in almost three decades. US shale companies have been caught in the melee, and now crude oil is so cheap that companies are forced to slash production.
After Russia failed to cut its productions because demand has been affected by the COVID-19 outbreak, Saudi Arabia vowed to increase its production by two million barrels a day. The global market is already oversupplied, and this announcement made crude oil price drop significantly.
Saudi Arabia can survive low oil prices longer than Russia
Saudi Arabia spends around $9.90 in the production of a barrel of crude oil, while Russia spends around $17.20 to produce the same. Therefore the Saudi Arabian government is confident that it can sustain low oil prices longer than Moscow can.
However, amid the on-going fracas, it’s US companies that are affected, and they face a recurrence of the 2014 to 2016 meltdown that bankrupted several US oil and gas companies. According to Rabobank energy strategist, Ryan Fitzmaurice indicated that Russia considers the US shale as vulnerable currently, and its move was targeting US shale companies that are debt-laden.