Everything you should know about the oil price war

By Sofia Arts Romero and Manon Goirand

Another important subject that is currently evolving, and having an economic impact on some countries, is the oil price war. Let’s unwrap and analyze the situation. Beforehand we will give you some context that will make you understand the situation. The main actors involved in the oil price war are the Organization of Petroleum Exporting Countries (OPEC), an Arabian-led intergovernmental organization of oil-exporting that includes 15 member countries, Saudi Arabia, Russia, and the U.S. However, Russia and the US are not members of OPEC, but they are allies as both countries are main oil exporters as well. Knowing this, we will analyze how a disagreement between these countries unraveled the so-called ‘oil price war’.

In March, prices had decreased over 45% in only 3 months from the beginning of the year to nearly $30 a barrel of Brent crude oil - one of the biggest ever falls in oil prices. This was the result of the failure in the agreement between Saudi-Arabia’s Organization of Petroleum Exporting Countries, globally known as OPEC, and Russia. Saudi-Arabia wanted to cut oil production due to the rapid decrease in demand influenced by the Coronavirus. Russia, however, opposed this idea and declined OPEC's proposal to cut down production. Saudi-Arabia then decided to discount oil prices and increase oil production to flood the market effectively and create a competitive price oil war, hence hurting the other big oil producers, namely Russia and the United States. This decision was solely made to prove the power that Saudi-Arabia holds over other exporters. In fact, despite the increasing oil production taking place in Saudi-Arabia, the International Energy Agency announced that the demand for oil will completely collapse this year for the first time since 2009, as transportation fuel consumption, which decreases as people quarantine in their homes, accounts for approximately 70% of oil consumption.

The question to ponder on is who is hurting the most? In this case, the United States’ oil production is increasingly being undermined due to Saudi-Arabia’s increase in supply, as shale oil production - the predominant oil production in the U.S. - is extremely costly compared to Arabian oil production. In fact, since the demand for oil-related products considerably decreased and oil production was increasing in Saudi-Arabia and not changing in other countries, storage places became full very quickly, therefore oil inventory was hard to place anywhere. This led to West Texas Intermediate (WTI) US crude oil to a negative price of a barrel of oil that went up to 37.63$ in the US (meaning buyers would be paid to buy a barrel). This is the first time in history that oil prices go negative, which shows the tremendous economic impact the coronavirus is having on the oil sector, leaving it extremely fragile. When oil prices are negative, it is a worry for the retail investors as well as the oil companies and their employees, due to several job losses, but of course, it benefits storage companies that will store the barrels and be paid for it, as well as oil traders and competitors. It is basically a situation in which companies pay traders to take oil off their hands. Similarly, Russia’s initial opposition in the agreement backfired as their oil production, known as Ural, is also more costly in comparison to Arabian oil production. Ural’s oil price per barrel went as low as 16.55$ in March.

Finally, in early May, an agreement was established between OPEC and its allies to cut the production of oil in order to stabilize the situation and neutralize the oil price war. Prices per barrel are rising back up as demand is slowly increasing again with the end of the confinement in some countries and gradually reopening their economy.

Through this oil price war, we saw what the consequences of the relationships between demand and supply, as well as production and consumption, can have on the global economy. Additionally, it is notable to point out to what extent some countries decide to reach in order to prove the power they have over others, in this case by weakening them and showing that they can ‘control’ the market in a way. Our final takeaway would also include how companies are trading mostly based on fear and emotion, as the coronavirus situation continues to evolve, rather than showing a more rational approach.