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Oil crisis: Saudi Arabia, Russia fracas over production cut sends prices crashing; puts Africa's cash-strapped producers in peril

FP Staff

The  oil price war between Saudi Arabia and Russia has left the oil producing nations in a shambles.

A three-year supply pact between the Organization of the Petroleum Exporting Countries (OPEC) and other producers, including Russia, fell apart this month after Moscow refused to support Riyadh's plan for deeper production cuts, prompting Saudi Arabia to pledge to raise output to a record high.

Crude oil benchmarks fell sharply on Monday, with Brent hitting its lowest since November 2002, as the global coronavirus pandemic worsened and the Saudi Arabia-Russia price war showed no signs of abating.

Saudi Arabia said on 27 March, it was not in talks with Russia to balance oil markets despite rising pressure from Washington to stop a price rout amid the coronavirus pandemic and an attempt by Moscow to fix a rift with the de facto OPEC leader, a Reuters report said.

On Monday, Brent futures were down 6.7 percent, or $1.68, to $23.25 a barrel as of 0249 GMT, after earlier dropping to $23.03, the lowest since November 2002.

US West Texas Intermediate (WTI) crude futures fell as far as $19.92, near an 18-year low hit earlier this month, and was last trading down 5.4 percent, or $1.17, at $20.34 a barrel.

The oil markets have been slammed by demand destruction caused by the coronavirus pandemic and the Saudi Arabia-Russia price war that is flooding markets with extra supply, Reuters said.

OPEC meet breakdown

In early March, a three-year pact between OPEC and Russia ended in acrimony after Moscow refused to support deeper oil cuts to cope with the outbreak of coronavirus. OPEC responded by removing all limits on its own production.

"From April 1 neither OPEC nor non-OPEC have restrictions," Russian Energy Minister Alexander Novak told reporters after marathon talks at the OPEC headquarters in Vienna.

International oil prices crashed by close to 31 percent, the second-largest margin on record, after the disintegration of the OPEC+ alliance triggered an all-out price war between Saudi Arabia and Russia, PTI said.

Saudi Arabia slashes prices

Saudi Arabia slashed its oil prices over the last weekend by most in at least 20 years and pledged to increase production after Russia refused to join the OPEC in a production cut as the spread of coronavirus continues to slow the global economy and oil demand.

The kingdom plans to raise production to 10 million barrels per day next month from 9.7 million barrels per day currently and could even reach 12 million barrels per day. Russia said its companies were free to pump as much as they could, a PTI report said.

International Energy Agency on Monday cut global oil demand forecast for 2020 by 1.1 million barrels per day as coronavirus spread beyond China

For the first time since 2009, demand is expected to fall year-on-year, by 90,000 barrels per day to 99.9 million barrels per day in 2020

"While the situation remains fluid, we expect global oil demand to fall in 2020 ? the first full-year decline in more than a decade ? because of the deep contraction in China, which accounted for more than 80 per cent of global oil demand growth in 2019, and major disruptions to travel and trade," it said.

African producers lose revenue

Collapsing oil prices have left African producers facing not only lost revenue when they most need it to tackle coronavirus, but also a fall in hard-won market share they may never regain.

The continent's producers such as Nigeria, Angola and Algeria cannot compete with the lower costs of erstwhile allies Saudi Arabia and Russia, who are flooding the market with oil.

In a sign of their desperation, the Republic of Congo's oil minister wrote to OPEC secretary general Mohammad Barkindo on 20 March calling for an urgent meeting to find a way to keep member nations from sinking into recession.

But while desperate for OPEC+, the Organization of the Petroleum Exporting Countries plus Russia, to ride to the rescue, Africa's oil producers have little leverage over them.

"They have no power," one Nigerian oil industry source told Reuters. "All they can do is ask."

Although non-OPEC nations such as Britain, Norway and the United States all have relatively high-cost production, their diversified economies mean they are not dependent on oil.

India to gain from Saudi-Russia price war

Industry association Assocham said the fall in crude prices will help India recover as low prices of crude can be a demand driver while also taming the inflation

However, Morgan Stanley believes that the drop in oil prices may not be good news for the economy as the gains will remain capped due to the overall weakness in the economy given the coronavirus-related health scare

The decline in oil prices, it said, will negatively impact the capex outlook for oil related sectors as well as oil producing countries, a PTI report said.

The fall in oil prices comes at a time when the global economy is already reeling under the impact of coronavirus, which has dented demand across sectors and economies

Rating agency ICRA said the plunge in crude oil prices is credit negative for Indian upstream companies as their realisations and cash accruals will decline. If the crude prices were to remain in the band of $30-40 per barrel, most of the Indian upstream companies could report losses, as the cost structure would remain rigid in the short-run.

--With input from agencies

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