Saudi Arabia recently sparked an oil price war with Russia and it has come at a time when the world is dealing with the coronavirus outbreak which is severely straining supply chains, fueling panic buying and grounding flights around the globe. American and global markets continue to struggle even after the FED used the biggest tools in their arsenal on Sunday. But what does all of this mean in regards to oil and the world economy?
Rihyad and Moscow had been working in concert boosting up global oil prices for the past three years, but the two key players had a major falling out over Riyadh’s insistence that they agree to cut oil supplies by 1.5 million barrels a day.
The reason behind the spat is surprisingly simple. China is considered to be by far the world’s largest oil importer. At the early onset of the COVID-19 breakout China began turning back oil tankers as the coronavirus forced the economy to a standstill.
Saudi Arabia and Russia have been working together to prop up oil prices for the past three years but the two had a falling out over Riyadh’s insistence that they agree to cut oil supplies by 1.5 million barrels a day.
The reason was simple. China, the biggest importer of oil, was turning back tankers as the coronavirus outbreak forced the economy to a standstill.
Oil prices recently took the biggest one-day crash since the 1991 Gulf War and analysts fear that there is still more to come as Saudi Arabia and Russia flood the market with more and cheaper oil. Goldman Sachs has even predicted oil prices could hit $20 a barrel.
On the global scale both Rihyad and Moscow will likely be able to handle the economic spat. Saudi Arabia has foreign exchange reserves of $490 Billion and Russia has reserves of $440 Billion.
But what does that matter to us here in Texas? Foreign monetary reserves are important because without them an economy can grind to a halt, unable to pay for its imports and debts. Factoring that into the equation, experts say that it only complicates things even more.
Saudi Arabia will likely need to borrow money to bridge between what it spends and the revenue it receives. A quick numbers crunch shows that the Kingdom needs oil prices of $82 a barrel to balance their books.
According to the International Monetary Fund, Russia needs to see Brent oil prices at $42 a barrel.
As some world economies continue experimenting with oil dependence, it means they have less money to spend in those areas.
Russia is extremely bitter over sanctions targeted at its oil giant, Rosneft Trading. Washington imposed the sanctions last month over its continued support in selling Venezuela’s oil. For Russia, this just complicated matters even more.
Moscow has been hoping to get Riyadh on its side to inflict economic damage to US shale producers. Why? Because Moscow feels that we here in America have been benefiting heavily on OPEC+ production cuts.
Shale production has pushed the United States into the number one spot as the world’s biggest producer of oil and ports here in Texas stand to benefit greatly from the spat. However, Moscow hopes that the spat will eventually do the opposite for American Shale producers, if oil prices remain below $40 a barrel.
Expert analysts say that the spat is hurting both Saudi Arabia and Russian economic footing and they predict that sooner rather than later, cooler heads will prevail. In the meantime, producers here in the States are likely in position to take full advantage of the situation to regain the upper hand in the global marketplace, if they were smart.
How do they do that? Experts say that the main factor at play will be immediately reducing complicated regulations in places like here in Texas and allowing producers flexibility to do their level best to get domestic oil into the marketplace.
Time will tell how long the spat continues and if places like Texas will allow producers to capitalize on it while they can.