As the consequences continue to pile up in the wake of the global coronavirus outbreak, Russia makes a surprise decision that will have tremendous implications on the global oil markets.
Let’s rewind back to 2014, when OPEC initially declared war on U.S. shale oil producers. Oil prices had begun to weaken as shale oil production continued to expand, so OPEC decided it needed to act to protect market share. A price war ensued that dropped oil prices all the way into the $20s. At that time I noted that the decision would probably cost OPEC a trillion dollars or more .
The downside of this strategy for them was that, while these production cuts do help support oil prices, they also keep U.S. shale oil producers in business. So, shale production in the U.S. kept expanding. This put OPEC in the cycle of having to cut production again and again as shale production kept climbing. Many OPEC members deemed this unfair, but they had already experienced the alternative and it was worse.
It’s worth noting that Russia also needs the money from its oil exports. But it is embarking on a potentially expensive gamble in refusing to cooperate with OPEC. They may sell more oil this way, but at a far lower price.But the global coronavirus outbreak has forced the issue. Now, instead of having to deal with the addition of another million BPD of U.S.
to the price of its crude oil in more than 30 years. Aramco shares, in turn, fell below their IPO price for the first time.with respect to U.S. shale oil production. The group tried one costly strategy, and then another, and now it is being forced by Russia back to the original strategy., oil prices could fall much further without Russia’s cooperation in making additional cuts.
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