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Russia-Saudi Price War Pressuring Oil? That's The Wrong Narrative

By Investing.com (Ellen R. Wald, Ph.D.)CommoditiesMar 12, 2020 11:35AM ET
uunda.com/analysis/russiasaudi-price-war-pressuring-oil-thats-the-wrong-narrative-200515321
Russia-Saudi Price War Pressuring Oil? That's The Wrong Narrative
By Investing.com (Ellen R. Wald, Ph.D.)   |  Mar 12, 2020 11:35AM ET
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78彩票网appThe oil market has been exceptionally dramatic and eventful over the last week. A combination of fundamentals along with misinformation has led to heightened volatility and a collapse in oil prices.

78彩票网appBut the current market narrative is deceptive. Below, are the real, crucial issues for traders. Here's what transpired and what's actually driving market instability right now:

What Really Happened:

78彩票网appFor most of last year, the market has been obsessed with the prospect of a global economic slowdown and fear of diminishing demand growth. The emergence of coronavirus only exacerbated these concerns further and introduced the prospect of a decline in oil demand in 2020.

It was that China—ground zero for the pandemic and thus far hardest hit by the coronavirus—reduced the cargoes of oil it would buy from West African oil suppliers and from Saudi Arabia. The prospect of lower demand, especially from China, stoked market worries and oil prices78彩票网app started to drop.

WTI Weekly Chart
WTI Weekly Chart

At its meeting last week, OPEC reacted by floating a production cut, designed to decrease supply enough to counteract lower demand and stabilize the market. Russian support for a production cut was necessary since OPEC was working with non-OPEC members within the OPEC+ framework.

Because Russia, China’s second-largest oil supplier, hadn't seen a reduction in its sales to China, the European nation didn't believe there was a reason to cut its own production to satisfy OPEC’s desires. When presented with a plan on Friday, Russia, acted in its own self-interest by , seemingly splitting OPEC+ in the process.

78彩票网appOver the weekend, news emerged that Saudi Arabia was both offering oil at significantly to customers—primarily in Asia—and increasing its available supply to 12.3 million barrels per day. These actions enerved the market, making it Saudi Arabia was starting a with Russia.

78彩票网appIn reality, a price war means attacks come from both directions: the next salvo would have to come from Russia, then Saudi Arabia, then Russia, etc. That hasn't happened yet. The market was so anxious about a potential price war, that when international exchanges opened at the start of the week, oil prices over 30%.

78彩票网appRussia responded to the Saudi move by saying it would its production (not necessarily decrease prices) and that it, if necessary, was to use its $150 sovereign wealth fund to support the economy and cover budget losses. On Tuesday, Saudi Arabia announced it was to supply up to 12 million bpd.

78彩票网appThis was a big deal. That number meant Saudi Arabia would be using up its spare capacity.

However, on Wednesday the Kingdom clarified that it would its government-mandated capacity to 13 million bpd, immediately setting off alarm bells since there was a misunderstanding about what Saudi Arabia meant by increasing its capacity. The market seemed to believe that this indicated additional production.

While that wasn't the case, for traders, what the market thinks78彩票网app is key. And right now, the market is scared of a price war.

Narrative Fueling Market Instability

So far, events do not confirm that Saudi Arabia and are in a price war, but we will eventually see if Russia is going to lower its prices below Saudi Arabia’s.

78彩票网appWhat we have now are two out of the three biggest producers in the world flooding the market with cheap oil. They are very likely looking to raise in hopes prices will stabilize.

78彩票网appMeanwhile, the market seems convinced that we have a price war, and that is why it’s so skittish. The instability and the threat of big drops will continue as long as this narrative persists. An actual price war could last months or years, but if Saudi Arabia and Russia instead succeed at shocking oil demand back to life, we could see stabilization at least when demand numbers come out in early May.

Russia-Saudi Price War Pressuring Oil? That's The Wrong Narrative
 
Russia-Saudi Price War Pressuring Oil? That's The Wrong Narrative

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Comments (27)
Helga Mercadal Kahl 8 hours ago
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lets have fingers crossed, we are out of the stagnation early than we think, and the market can rol again
Chip Mar 14, 2020 2:58PM ET
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As always thoughtful analysis.
Fereydoun Barkeshli Mar 13, 2020 4:02AM ET
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It is true that most market analysts don’t have a clear picture of market fundamentals and price behavior. You explained very well. However what satisfy analysts and market watchers is that Saudi Arabia and Russia disagreed over production cuts and entered a market share war. Mr. Zaki Yamani once called it Fair Market Share Policy. The difference this time is that the Kingdom virtually started pumping more oil though from storages plus offering lavish discounts that wasn’t demanded by customers.
TR LH Mar 12, 2020 12:59PM ET
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They are most certainly in a price war. Russia refused cuts so Saudi? cut prices and increased production and Russia said they would increase production. So just as you say we have a ******for tat and therefore a price war. The only thing not 100% clear is their motives. Is it directed at U.S producers? Is it chest bumping by these two players or is it all of the above. The bottom line is that it is crushing U.S producers. The Feds need to step in and use whatever leverage they have to get this under control/
Infinite Eight Mar 12, 2020 12:43PM ET
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Nice article but beg to disagree. demand will continue to drop massively and production, unless halted, will flood markets and replenish floating storages. Producers will need to offer enormous discounts to place their product but market is not absorbing most of the oil. Nigeria only was able to place half of it's production. Oil war is here and nothing can be done. Russians were right. Cutting was only a make up to the market.Three years of cuts and market manipulators won nothing but to strengthen US Shale.my two cents from the field
Moses Chege Mar 12, 2020 12:42PM ET
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I am sending you an invoice for wasting my 10minutes
Aikimaniac Mar 12, 2020 12:33PM ET
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What is is the "European nation"? :-D
DoRight 1 hour ago
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Dr. Wald is referring to Russia.
Richard Sullivan Mar 12, 2020 12:18PM ET
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great thoughts but yes you didn't speak to Russian and Saudi desires to ********the shale producers
Zach Twist Mar 12, 2020 12:18PM ET
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You get your phd from university of phoenix? Dunbest thing ive reas
Fib123 Mar 12, 2020 12:10PM ET
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This is a coordinated effort to bring down US shale...everyone seems to have forgotten about the high-five at the most recent G20 Summit.
Noe Aguilar Mar 12, 2020 12:10PM ET
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who cares about US ....
JC Carlton Mar 12, 2020 12:09PM ET
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We have needed this for years. If OPEC had some backbone back in 2016 they would have put some floor in Shale then. They just kicked the pain can down the road and here we are. It will take a year for Shale to bring in production. It needs to drop at least 3mbpd back to 10 in order to bring things under control.
adel alotubi Mar 12, 2020 12:03PM ET
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the russian bear should bows to our demands ????
kai shiran Mar 12, 2020 12:03PM ET
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Good luck with that fantasy
Stock Master Mar 12, 2020 12:03PM ET
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already bowed
adel alotubi Mar 12, 2020 12:03PM ET
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kai shiran Whoever laughs last laughs a lot
you what Mar 12, 2020 12:03PM ET
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adel alotubi europe will have the last laugh as we move faster away from oil LOL
CHAITANYA PARKASH Mar 12, 2020 12:02PM ET
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usa should also declare cut in production .as opec and Russian cut usa took advantage
Yulia Hulia Mar 12, 2020 11:09AM ET
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The Opec deal was destined to fail. The price was going down anyway.
Ramm Batts Mar 12, 2020 10:35AM ET
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Russia and Saudi cut USA floods the market so itvis USA that needs to cut
RDavid Clement Mar 12, 2020 10:35AM ET
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US oil production last week was cut by over 65,000 barrels, demand is shrinking faster than production can be slowed. No company wants to drive down prices below the cost of production.
John Brannon Mar 12, 2020 9:18AM ET
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"What we now have are two of the three biggest producers in the world flooding the market with cheap oil." At approximately 13 mbpd, it's 3 of 3 flooding the market, for the time being.
RDavid Clement Mar 12, 2020 9:18AM ET
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So ur saying US and Russia have increased supply? It seems more like only Saudis did that, the rest is shrinking demand. In fact, Fracking has slowed as those producers lose money on every barrel at this point.
cran Vivid Mar 12, 2020 9:01AM ET
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Thanks for the insight
James Kim Mar 12, 2020 8:34AM ET
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Lol you’re the wrong narrative. I just read that there is a price war.
agsn Mar 12, 2020 8:06AM ET
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This article does not reflect reality. When saudi says they are going to increase the production to 13mbpd it is to sell those to offset any drop in price that they are already expecting. They already know it is going to hurt their bottom line even with the increased sales. But it wont be any worse than if they did not and saw a drop in price anyway.? The simple calculation is to make Russia feel the hurt of their non-co-operation, with inflicting the budget shortfall hurt on Russia. They know either way they will have to take a hit on their own budget for the next 4 months. At least in the next negotiation Russia will think twice before playing the russian roulette.? ? ? ? ? Oil will drop and continue to drop,? The only thing that will stop the oil slide is? if Russia finds a way to cut production now accepting Saudi compromise.? There will be no winners among russia and saudi. Shale will survive because they are hedged for the next 4 months until the Virus scare ends.
David Kuo Mar 12, 2020 8:04AM ET
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A spoken war seldom becomes a real one. Wise people know when to calm down and show no more the teeth.
Rishi Kakkad Mar 12, 2020 7:45AM ET
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Good note , but looks very optimisitc. The sequence of events actually do not point what you have written, may be yes its not a price war but we can say its a ego war
Jan Skilbrei Mar 12, 2020 7:44AM ET
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how can you chock out demand, during pandemic increasing lockdowns?
Satish Kumar Mar 12, 2020 7:43AM ET
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thank you Ellen
dhiller Mar 12, 2020 7:40AM ET
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Very good summary.
Ahammed Saleem Mar 12, 2020 7:16AM ET
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Very well explained indeed!!!??
 
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