The International crude oil prices have been strengthening in the past couple of days as Saudi Arabia and Russia have agreed for an emergency meeting to discuss upon the modalities of a proposed production cut in order to boost prices. The meeting which is rescheduled for Thursday, 9 April 2020, has been called for after a series of phone calls made by President Donald trump to persuade both sides for a truce. Several mid and small sized oil producers have scaled down production in the past few days in response to the deep cuts in prices of the commodity after a major price war was initiated by Saudi Arabia and Russia. Earlier Russia has refused to participate in a production cut programme proposed by OPEC in order to check the slide in oil prices exacerbated by the coronavirus pandemic prompting Saudi Arabia’s actions. The United States, currently the largest producer of crude in the world, was at the receiving end of this price war as thousands of jobs in its shale oil industry were at stake. The talks if get succeed could lead to a total production cut between 10 million and 15 million barrels per day initiated by various sides.
- Background of OPEC Decision To Cut Oil Production
Organization of Petroleum Exporting Countries (OPEC) had called for a meeting of its member countries and Russia in the first half of March this year to discuss about the demand levels of crude in the International market. Since December 2019, when the coronavirus epidemic case was first reported in China across the globe, there has been a massive shutdown of production activity in the country. With the fall in business activity levels and lower levels of vehicular use, the demand for fuel oils began to come down. China being one of the major importers of crude oil, a demand slowdown in that country started to impact the global crude oil prices. At that time, it became fairly clear that the epidemic will also spread to other parts of the world which would further impact the world consumption of crude oil for quite some time. The OPEC then proposed a production cut of 1.5 million barrels per day at least till the end of 2020 and had requested Russia to participate in this scheme.
- Saudi Arabia and Russia Price War
The trouble between Russia and Saudi Arabia started early in March this year when a meeting of the OPEC decided to cut production in view of the falling demand of oil amidst the impending global slowdown. Russia had an ongoing understanding with OPEC where it had agreed to work with the organization to implement decisions catering to the best interest of both parties. The decision of Russia to not abide by OPEC’s production cut idea around this time led Saudi Arabia to increase its production substantially as well as to reduce its official selling price of crude to a significant level. The collapse of the agreement created panic selling in major Asian as well as Global markets with the fears of a 2014 crude price crash to reiterate. The decision of Saudi Arabia to increase production and cut prices led to an immediate fall in crude prices internationally, with crude prices coming down by nearly two third. The deteriorating state of crude prices led to initiation of intense back channel discussions in order to bring both the warring parties back to the negotiation tables. Finally, it seems both parties are now willing to consider each other’s position and work towards supporting the world’s crude market.
- Role of America
The United States of America is currently the largest producer of Crude oil with its vast resources of oil sands. Over the years, it has emerged as the major player in the industry. The sudden fall in crude prices ensuing the Saudi Arabia decision led to many of the American oil producers to the brink of bankruptcy, putting thousands of oil and gas industry jobs at risk. Thus, the role of United States as a facilitator in these talks is much accentuated. President Trump on Monday had stated that production in the United States will automatically fall in retaliation to the falling prices and that a fall in production is already being witnessed. Last week OPEC and Russia held discussions which resulted in both sides appealing for other large producers like United States to join in the production cut. Reacting to the news of such an appeal being made, the American president stated that he has not received any official communication from any of the parties concerned and that he will take a call in this regard if he receives a request. It is to be remembered here that in United States any coordinated effort by producers to influence prices is prohibited under the countries anti-trust laws. However, such an effort can be made if the president initiates it. Thus the role played by the American president in this regard could be crucial in determining which way global oil prices would move.
- Crude Market Response On The News Of OPEC Meeting
In response to the news, the price of Brent Crude Futures rose to $33.78 per barrel on 7 April 2020, increasing by 73 cents after having suffered a fall of nearly three per cent in Monday’s trade. Similarly, the prices of the US crude oil WTI Futures also rose by 97 cents to stand at $27.05 per barrel while having lost nearly eight percent in the previous close. Both the major stock exchanges on both sides of the Atlantic gave a good response to the news. The S&P 500 index of the New York Stock Exchange grew by 7.03 per cent to close at 2663.68 on Monday and the FTSE 100 grew by 2.30 per cent to be currently trading at 5710.63.
The coronavirus pandemic continues to ravage the world economy for some more months now. The International Monetary Fund (IMF) has already declared that the world has entered into a recession. Central banks, governments and international financial institutions are working hard to help business stay afloat by rolling out stimulus packages and announcing interest rate cuts. It is imperative that price levels of crude be set at sustainable levels so that most of the oil and gas producers survive these difficult times. The coordinated efforts of these largest producers of crude could go a long way in restoring the confidence levels in the industry as well as protecting thousands of jobs in numerous countries where economies are largely dependent on crude oil exports.
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