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Oil crash: why Saudi Arabia has started a global crude price war (Part I)

[Reading level: C1 – Advanced]

Oil prices crashed by as much as 30 per cent after Saudi Arabia fired the first shots in a price war, in crude’s biggest one-day fall since the early 1990s Gulf war.


Riyadh’s threat to discount its crude and raise production prompted the price of Brent crude, the international oil marker, to fall to as low as $31.02 a barrel. West Texas Intermediate, the US benchmark, fell to $27.71 a barrel.


But why did the world’s top exporter decide to move so aggressively, with demand reeling from the coronavirus crisis? And what does it mean for the wider oil industry?


Why is Saudi Arabia launching a price war? – Tại sao Ả Rập Saudi lại phát động cuộc chiến giá cả?

Saudi Arabia had wanted to lead OPEC and Russia in making deeper cuts to oil production to support crude prices in the face of the coronavirus outbreak, which has disrupted global economic activity. But when Russia baulked at the plan, the Gulf kingdom turned on an ally it had worked with to prop up the oil market since 2016.


Riyadh responded by raising production and offering its crude at steep discounts. Analysts said that was an attempt to punish Russia for abandoning the so-called OPEC+ alliance.


Saudi Arabia may also have wished to cement its position as the world’s top oil exporter, analysts added. The move demonstrated that Riyadh was willing to openly take on Russia and other higher cost producers.


“There was a consensus among OPEC [to cut production]. Russia objected and has said that from April 1 everyone can produce whatever they like. So the kingdom too is exercising its right,” said one person familiar with Saudi oil policy.


Analysts have questioned the wisdom of Saudi Arabia’s approach. Its economy is not immune to a price crash, even if it believes it can win market share from its rivals.


But under Mohammed bin Salman, crown prince, the kingdom has gained a reputation for risky and unpredictable moves when it has felt the need to assert itself.


Why did Russia not agree to cut production? – Tại sao Nga không đồng ý cắt giảm sản lượng?

Russia said it wanted to see the full impact of the coronavirus on oil demand before taking action.


But Moscow has also been keen to test the US shale industry. It believes that cutting output would only hand a lifeline to a sector whose growth has turned the US into the world’s largest oil producer, gaining customers at Russia’s expense.


US sanctions on Russian energy companies, including those that targeted the trading arm of state-backed oil champion Rosneft last month, and attempts to halt the Nord Stream 2 gas pipeline to Germany, have infuriated the Kremlin.


US shale has struggled to be profitable despite its growth over the past decade. People briefed on Moscow’s strategy said Russia thought there was an opportunity to hurt the US oil industry.


“The total volume of oil that was reduced as a result of the repeated extension of the OPEC+ agreement was completely and quickly replaced in the world market with American shale oil,” a spokesman for Rosneft said on Sunday.


Saudi Arabia’s approach to a possible deal with Russia was a take-it-or-leave-it demand to join them in reducing an additional 1.5m barrels a day, taking total cuts to 3.6m b/d or roughly 4 per cent of global supply. That is thought to have riled Moscow, which does not see itself as a junior partner.


[To be continued]

Oil crash: why Saudi Arabia has started a global crude price war (Part II)





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