First the China-US trade war, then the coronavirus pandemic. The global economy is suffering from increased instability in international politics and the sudden emergence of global “black swans”. The impact of this new situation on oil prices has been deep, and risks deepening if the next OPEC+ meeting (initially scheduled on April 6th and then postponed),will fail to end the current price war between Saudi Arabia and Russia.
The coronavirus – officially known as COVID-19 – crisis has escalated dramatically over the past few weeks, in a way that has shocked billions of people, and taken many politicians around the world by surprise.The economic repercussions of this crisis have plunged the global oil and stock markets to record lows, while the measures taken by governments and central banks to contain the situation were unprecedented.
The sudden plunge of oil prices that took place earlier this month in a context of global coronavirus crisis and a Saudi-Russian price war, has brought the price per barrel below $US 30.
This time it's different. The ongoing oil shock has a precise origin: the new SARS-COV-2 coronavirus pandemic. During the 2007-2008 subprime mortgage crisis, the collapse of international trade was linked to the fear of a crack in the financial system. In this case, the lockdowns in Asia, Europe, Africa, Oceania, North America and South America are having a greater magnitude. And the volatility of the oil price reflects this new dimension. Italy is not immune to contagion. The consequences can be long-term.
While the Gulf Cooperation Council (GCC) infrastructure projects aim to reduce the impact of oil price volatility on the Gulf economies, the projects’ viability remains directly linked to government spending, and thus revenues from oil, and are currently vulnerable to the oil price war, COVID-19 and, subsequently, the economic recession, supply-chain disruptions, and labor risks.
The last time the price of oil nose-dived was in 2015/2016, when it plummeted to 28 dollars a barrel after years of relative stability at over 100. OPEC was seen to be powerless, but soon the Russians and Saudis decided that a little conflict of interest over Iran and Syria should not preclude brotherly collaboration between two great oil-producing nations. Money first. After some discussion, they reached an agreement and the price rose again, initially to over 80 dollars a barrel before finally zig-zagging between 50 and 60, a fair figure that suited all involved.
The feeble surge in oil prices on April 3 reflected the markets’ optimism that a truce in the Saudi-Russian oil war may be at hand. As the OPEC+ producers prepare to meet on April 6, it is worth trying to assess the motivations behind Saudi Arabia’s decision to launch such a war, as well as its implications for the Kingdom itself.
Since the start of the standoff between Russia and Saudi Arabia on oil production cuts and the following sharp decrease in oil prices, much ink has been spilt over Russia’s supposed resilience compared to its former OPEC+ partner.
Global oil demand has hit historical lows over the last weeks due to the economic slowdown caused by the Covid19 pandemic. Big producers such as Saudi Arabia and Russia have been bickering over collective production cuts and have engaged in a deadly price war that pushed prices down to 20 dollars per barrel.
Lebanon defaulted on its debt for the first time in the country’s history.