By Anjan Roy
As the world is reeling from the spread of corona virus widely in United States and Europe, there was shock and panic in the oil markets and benchmark oil prices dropped by a huge 30 per cent on the opening day of the week.
This could be a good augury for India in the most of the current slowdown. As oil prices have some influence on the general level of prices, the rising inflation could get a breather. A gentler price environment could also give a little more leeway to the central bank to pursue growth friendly targets.
Benchmark Brent crude and WTI crude dropped to around $30 per barrel on Monday morning whereas it was prevailing around $50 last week till Friday.
Pessimists would say, sudden deep slides mostly get reversed. However, the current fall in oil prices are results of more than one underlying factors and these are not likely to change too soon. Apart from the virus-induced slow down in major economies, the oil price fall has to do with evolving geo-strategic position of one of the largest oil producers — Russia and its sole decision-maker Vladimir Putin.
The fall was the culmination of market dynamics started since early February as Chinese demand for oil started falling with the spread of corona virus there. As Chinese industry slowed down, and demand for all imports dived, the oil demand also flagged.
China has emerged world’s largest oil importer, following rising internal US oil production. United States’ shale gas and oil industry oil production has increased rapidly and as a result the country which was once the largest oil importers turned into a net exporter.
These developments had been exerting downward pressure on the global oil markets for some time now. The downward push became all the more irresistible with China’s slow down.
The down side risk was however further met with a sledgehammer swing with Russia’s change of its strategy. Until now, Russia had grudgingly co-operated with the OPEC member countries for managing the global oil prices. It had somewhat agreed to contain production to prevent excess oil supplies on the global markets.
At last week’s OPEC cartel’s meeting in Vienna, Russian oil minister refused to co-operate with the OPEC members to further cut production. Instead, it conveyed Russia’s unwillingness to hold back production any more to stop oil supplies to spill over and cause prices slip.
Russia’s big oil producer, Rosneft, has always been disgruntled about holding production down for the sake of maintain prices. Instead, with its vast reserves, Rosneft advocated fresh investments in developing these virgin fields and jack up production to increase its market share.
The inherent conflict of interests between Russia and Saudi Arabia made the agreement between the two untenable any longer. The divorce between the became open in last week’s Vienna meeting, where the two countries oil ministers are said to have not exchange even a formal smile.
Of course, Russia is not a core part of the OPEC and it was there only as a “OPEC-plus” member. But even in that outsider-come-insider status meant Russia was far more important a player than anyone else in the cartel than Saudi Arabia. And even the Saudis were dwarfs compared to Russia’s global heft and its geo-political stratagems of the only man who calls the shots when Russia is involved.
Saudis were in fact playing this campsite game with Vladimir Putin and the fine balancing pirouette lasted only as long as it suited him. Now Putin is said to be angry with the United States for its persistent pursuit of sanctions against Russia. USA has opposed building of an ambitious pipeline from Russia to Germany for supply of energy products.
Popularly called Nordstream pipeline, the commissioning of this outlet for Russian gas and oil could take the burden on Russia to find alternative routes of supply for Russian energy products to a lucrative ad stable market close at hand.
This pipeline would also give Russia access to the European markets bypassing Ukraine which was the earlier route. Ukraine has extracted its pound of flesh for the service by way of commission for transmission as well as when relations with that country strained Russia faced problems with transportation of its energy products.
By withdrawing from the OPEC-plus arrangements, Russia in fact wanted to hit the US oil and gas industry. More particularly, the shale gas and oil industry which needs a far higher levels of realised rice to remain viable. These producers need around $60 per barrel price to remain profitable. As prices plunged to the current levels, most of these shale wells are feared to close down.
According to Russian strategic thinking, maintaining the global prices for oil by cutting production by OPEC-plus producers, incentives were being extended for the continuing operation of the US oil and gas industry. Once these close down and start pinching the US, its pain will also be hopefully tradable.
The global economy was hit by news of a fall out between Saudi Arabia and Russia over the strategy to meet falling oil prices and oil strategists will keenly watch the next step of both the powers. (IPA Service)