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Oil Price War: Tentative Deal Achieved with Iraq

 

The COVID-19 pandemic has disrupted economies worldwide. Lockdowns and tight restrictions have resulted in dramatic consequences, especially for commodities. In particular, oil and gas have suffered the most as their prices plummeted as a result of oil companies which continued to produce the commodity despite its low demand and potential to cause disruptions well beyond the energy sector.

 

While oil price fluctuations are not new phenomenon but recent events have sent oil companies and investors in a state of alarm. The demand for crude could fall by 27 million barrels a day in April, according to Rystad Energy AS, while Trafigura Group estimates the current hit to consumption is around 35 million barrels a day.

 

Due to this, the world’s top oil producers pulled off a historic deal to cut global petroleum output by nearly a 10th, putting an end to a devastating price war but not going far enough to offset the impact of the coronavirus pandemic. But this cut has led to a spat between the two major oil-producing nations in the world, Saudi Arabia and Russia.

 

 

Saudi Arabia- Russia Showdown

 

Saudi Arabia is a part of OPEC (Oil Producing and Exporting Countries) which is an intergovernmental organization of 13 nations, headquartered in Vienna, Austria. The oil cartel controls around 80% oil reserves; however, their contribution in the global production is only 30 per cent.

 

In March 2020, Saudi Arabia proposed a cut in oil production to a wider group which composes the OPEC+ group, which is led by Russia and who strongly opposed the proposition. The opposition against the oil cut by Russia was considered a geopolitical move against the United States which had put sanctions on Russia’s largest oil company Rosneft earlier in February 2020.

 

Following these events, Trump Administration intervened and threatened to withdraw U.S. military support from Saudi Arabia if OPEC and its allies won’t cut oil production. In response, the Russian energy minister set up an extraordinary OPEC meeting and stated that global production could be cut by 10 million barrels which led to a jump in oil prices and US oil prices increased by 25% on 2 April, the biggest one-day increase in history.

 

 

Iraq’s Refusal to Comply

 

However, Iraq raised concerns as it refused to comply with the production cuts and produce more than the quota set. As a result, both Saudi Arabia and Russia have been holding negotiations with Iraq throughout last week. The objective was to push the reluctant state of Iraq to stop dodging its share of cuts and to compensate for its failure to comply with the production cuts in the past. OPEC will meet on Sunday followed by a meeting by OPEC+ following the tentative deal that has been achieved with Iraq. The yet to be ratified agreement will extend its historic production cuts for another month until the end of July.

 

Had this agreement not come to fruition, millions of barrels of oil could have entered the marked which would have led to a blow to the fragile recovery as countries start emerging from coronavirus lockdowns. With U.S. shale production starting to come back online, OPEC’s careful management of the demand recovery is crucial.

Essence of the Oil Price War

 

Despite the crude diplomacy and so-called oil price war, the projected revenue for oil and gas companies involved in exploration and production is expected to decline by 40% year over year: from $ 2.47 trillion to $ 1.47 trillion. While the impact of this alignment in the short-term has been low and insufficient, the medium- and long-term effects could be substantial. The agreement between these three major players to soften the oil price shock sets a precedent for future collaboration for global energy security and economic growth.

 

Energy is a critical enabler of prosperity and economic growth, and the stability of global energy markets is essential to sustain and nurture the modern industry and society.

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