Compass World: Refine-Tuning Oil Prices
Saudi Arabia’s King Salman meets Russian President Putin. (Wikipedia)
China’s growing coronavirus epidemic has the state’s economy paralyzed. As a result, oil demand has plummeted worldwide, and international players in the oil market – normally accustomed to meeting meticulously negotiated quotas – have been thrown for a loop.
A Slippery Slope?
The price of Brent Crude, an international benchmark for oil prices, has fallen nearly 19 percentage points to its lowest price in over a year. In response, the Joint Technical Committee (JTC) – a body that advises the Organization of the Petroleum Exporting Countries and its allies (OPEC+) – convened a three-day discussion to decide on how to best counter the plunging global demand for oil, driven by China. The JTC recommended an interim cut of 600,000 barrels per day (bpd). This proposal must first overcome Russian skepticism.
The price of Brent Crude has fallen sharply in the past month. (OilPrice.com)
Russia has a history of initially opposing OPEC’s preferred strategy. Sources close to the negotiations have reported that Russia dislikes outright output cuts and prefers instead to extend current limits and to push back negotiations until early March. On the other hand, Saudi Arabia – OPEC’s (and the world’s) largest oil exporter – highly values short-term oil production and prices. These contradictory policy approaches suggest that both states may not be able to successfully coordinate oil policy.
Greasy Relationships
This friction is nothing new. Saudi Arabia and Russia’s rocky relationship was (and still is) most recently tested during the conflict in Syria. Whereas Russia supports the current Syrian regime, Saudi Arabia has long propped up the insurgency movement within the state. Despite that a surprising friendship between President Vladimir Putin and King Salman bin Abdulaziz Al Saud has recently blossomed. This dramatic shift can be attributed to the Saudi government’s growing tensions with the United States, stemming chiefly from the Obama administration’s support for the 2015 Iran nuclear agreement and the murder of Saudi Washington Post journalist Jamal Kashoggi by Saudi agents in 2018. The former threatened Saudi Arabian interests in the Middle East while the latter received massive pushback from the Western press. Despite recent attempts to improve US-Saudi relations, Russia has already taken advantage of the hiccup and befriended the shunned Saudi state.
Prices Barrelling Downward
As Russia and Saudi Arabia inevitably fight over a price response to the fall in global demand, the probable end to the Libyan Civil War looks to add to oil market chaos: with an already present global surplus of oil, Libya’s looming reentrance into the global oil market will only further drop the price of oil.
Even though negotiation may feel futile for both Saudi Arabia and Russia, both will truly benefit. Cooperation allows Russia to continue influencing global oil prices and expanding its influence within the Middle East; Saudi Arabia, still dependent on oil despite its quest to diversify its domestic economy, will appreciate help from abroad.