Saudi-Russian Oil Price War Truce Doesn’t Meet Expectations

Saudi Russian Oil War

The oil cost in April 2020 has, for now, bounced back after diving into an 18-year low. From Q1 on, a perfect storm of demand lowerings thanks to the pandemic and oversupply brought on by a price war between Saudi Arabia and Russia. Prices retreated on Thursday once more as petroleum manufacturers proposed manufacturing cuts. These will decrease output by less than anticipated and leave the industry vastly oversupplied.

On Thursday, ahead of a video conference between OPEC+ members (Organization of Petroleum Exporting Countries) and non-OPEC oil-producing countries, oil prices rose sharply. The market expected an agreement after the meeting was postponed from Monday. Saudi Arabia and Russia have been at odds over petroleum production levels since early March. Participating in a bitter price war that saw prices drop by more than 60% in a couple of weeks.

Investors watch the war of words between the two countries carefully. They search for hints about what it may mean for costs in the forthcoming months. Demand has dropped as transport and industrial activity has stopped during shutdowns to combat the spread of COVID-19. It might take a radical supply cut for the market to regain balance.

This report clarifies the OPEC+ proposition, agreed on Thursday, and what impact it’s very likely to have on the marketplace.

April 2020 Oil Price Evaluation: Price War & Covid-19 Both Create Chaos

The first quarter of this year found the worst performance on record for the current market, with the oil price falling sharply. The worldwide grade Brent crude oil cost dropped from $68.91 per barrel at the end of January to $22.74 at the end of March. It’s the lowest since 2002. Prices moved up to over $30 per barrel in the first days of April, for a profit of 50% from the low on hopes of an OPEC+ bargain to decrease production.

On Thursday morning, Brent crude gained as much as 10.8% to $36.40 per barrel in anticipation of the OPEC+ meeting. While the US benchmark, West Texas Intermediate (WTI), climbed 13% to a peak of $28.36 per barrel.

However, the proposition that came from this assembly fell far short of the expectations of the market. Saudi Arabia and Russia agreed to reduce collective output by 5.3 million barrels daily to 8.5 million in May and June. Members agreed to cut distribution by 23 percent in that span.

OPEC+ will find a further daily cut of 5 million barrels from non-members at a meeting of G20 ministers on Friday. A bigger cut coming from the meeting could offer some aid to the current market. Turning the focus to the US, currently, the world’s biggest manufacturer has resisted participating in talks about a cut.

A reduction of 10 million barrels is a historical high, accounting for approximately 10% worldwide consumption. It was already priced into the market. Participants were searching for a bigger number. Demand’s estimated fall by nearly 35 million barrels per day from the coming weeks, as government-ordered lockdowns have floored economies worldwide. Oil price immediately fell back on the info, with Brent slipping towards $31 per barrel. At the same time, WTI exceeding $22.50 for each barrel.

Analyst Prognosis: What Now?

Oil price chart evaluation in April 2020 reveals there are pockets of support from $20-25 per barrel. There’s some scope to move upwards towards $30 per barrel on dip purchasing in the coming days. This will probably maintain the market volatility within the wider price tendency.

The principles point to the disadvantage over the long run. The production cuts agreed in the OPEC+ bargain inadequate given the sharp drop in global demand as nations continue to take care of the pandemic’s spread.

The expectation was to get a cut of 15-20 million barrels every day. The shortfall from the proposal prevented costs from going upward. International petroleum storage capacity is practically topped, floating storage rates have quadrupled, and will likely keep on increasing.

Analysts expect that the requirement destruction is so big that a deal will not restore market equilibrium in the upcoming quarter.