Another oil price war could send crude crashing

The global economy has been devastated by the Corvid-19 pandemic. With the manufacturing and services contracting and millions thrown out of work, economic conditions have been severe. Predictably, this has led to decreased demand for oil by the world’s major economies. The result has been huge fluctuations in the price of oil in recent months. US crude (WTI) declined by 55% in March and a further 24% in April, as the price of a barrel of oil fell as low as USD 11.04. This rock-bottom price didn’t hold for long, however, and crude rebounded with a staggering gain of 98% in May, followed by a gain of 24% in June. Currently, crude is priced at around USD 40 – consider that on January 1 of this year, the same barrel was selling for $61.

While the global economic crisis has much to do with the low price of oil, it is by no means the sole explanation for the decline in crude. Behind the scenes, a price war over oil is playing out, with some of the world’s largest oil producers pitted against each other in a bitter dispute.

The oil price war began in early March. Russia, the third-largest oil producer in the world after the US and Saudi Arabia, refused to sign on an extension of a round of cuts which had been agreed upon last December. Saudi Arabia responded furiously, declaring it would increase production and lower prices. This sent oil prices plummeting by some 25% in just a few days. In April, with demand for oil sagging due to Corvid-19, Russia and Saudi Arabia hammered out a deal to cut production, and prices have since moved higher.

Saudi Arabia has emerged as OPEC’s policeman, and the price war with Russia showed that the Saudi’s patience for nations that don’t toe the line has worn thin. The fact that OPEC members have exceeded their production quotas is old news; what has changed is Saudi’s Arabia willingness to turn a blind eye to the outright cheating by its oil-producing colleagues. There are reports that Saudi Arabia has threatened Nigeria, Angola, and Iraq, all OPEC members, with another price war if these three countries don’t honor their production quotas. Russia and the Saudis continue to view each other with suspicion, and the uneasy alliance between these giant oil producers could fall apart, once again triggering an oil price war at a time when demand for oil has been curtailed by a global pandemic.

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Kenny Fisher

Kenny Fisher

Market Analyst at OANDA
A highly experienced financial market analyst with a focus on fundamental and macroeconomic analysis, Kenny Fisher’s daily commentary covers a broad range of markets including forex, equities and commodities. His work has been published in major online financial publications including, Seeking Alpha and FXStreet. Kenny has been a MarketPulse contributor since 2012.