MarketsFarm — Benchmark crude oil prices plummeted 30 per cent on Monday, after a price war erupted between Saudi Arabia and Russia. While that will mean lower prices at the pumps for consumers, the price war will not bode well for the Canadian economy, according to a pair of industry experts.
“We already had the economic effects of the rail blockades, a number of key announcements by investors in the energy sector that they’re packing up to leave Canada, and then of course we have the coronavirus, which puts pressure on a resource nation,” said Dan McTeague, president of Canadians for Affordable Energy.
Most commodity prices are in U.S. dollars, which erodes Canada’s purchasing power, he added.
“The Americans will get the benefit of the drop and Canadians will see that benefit not quite extended to us, because a weaker Canadian dollar doesn’t get us the same amount for our commodities,” McTeague said.
Phil Flynn of the Chicago-based Price Futures Group noted things will become very difficult for those Canadian oil producers that were already struggling financially.
“The hope is some of the economic stimulus measures that the country already recommends today will give the market a little bit of a boost and give a bit of confidence to the market,” he commented, noting there could be bargain buying.
“When people were happy to pay US$60 per barrel for oil a couple of months ago, oil at US$30 per barrel looks like a pretty good deal,” said Flynn.
The price war resulted from the March 6 break-up of OPEC+, which was the alliance of the Organization of Petroleum Exporting Countries (OPEC), with Saudi Arabia as its long-time de facto leader, plus Russia and their oil-producing allies.
In late 2019, OPEC+ moved ahead with production cuts of 1.7 million barrels per day (bpd) and that was increased in January to 2.1 million bpd. In OPEC+ meetings last week, the Saudis pushed for another 1.5 million due to the reduced demand caused by the COVID-19 coronavirus outbreak.
Prior to Friday, the Russians initially balked at a smaller cut of 600,000 bpd, but reportedly agreed to a one million-bpd cut a few days later. However the four-year-old OPEC+ alliance disintegrated when the proposed cut was upped to 1.5 million.
Not only did the Saudis quickly slash their oil prices in the aftermath, they also vowed to ramp up production beginning in April. The Russians also vowed to crank up their production as well next month. Some reports stated the Saudis will push production as far as 10 million to a record 12 million bpd.
“Russian oil companies are very concerned about losing market share to the U.S. They don’t want to look like they are being dictated to by Saudi Arabia,” Flynn said.
The impact of shale oil production from the U.S. flooding the global market was a major factor in the creation of OPEC+ in 2016.
The Russians want to sell more oil to the world, McTeague said.
“I don’t think they anticipated Saudi Arabia to respond as violently as they did by dumping the costs and flooding an already saturated oil market,” he said.
The Saudis and Russians made a tremendous mistake, Flynn said.
“Saudi Arabia, along with their cohorts Russia, like to fancy themselves as the ‘central bank of oil.’ They say their mission is for a stable price that’s good for the producers and the consumers, and the first time they have a little bit of a conflict, they put the global markets in turmoil on purpose,” he said.
This is not the first time Saudi Arabia indulged in a price war. In the mid 1980s, when the U.S. increased its production, the Saudis followed suit. In the 1990s, Saudi Arabia pushed oil down to US$10 per barrel in a price war with Venezuela.
— Glen Hallick reports for MarketsFarm from Winnipeg.