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Hurtful oil price crash may force big producers back to negotiation table

Four weeks after two of the world’s biggest oil exporters Saudi Arabia and Russia failed to reach an agreement on new production cuts under the OPEC+ arrangement; early signs show a possible return to the negotiation table.

On Friday, Kirill Dmitriev, head of Russia’s sovereign wealth fund suggested his country was willing to consider returning to the negotiation table but on the condition that the deal includes more countries than those that had formed the redundant Organisation of the Petroleum Exporting Countries and other producers including Russia (known as OPEC+).  The existing deal expires on March 31.

Although in Russia, there is no consensus yet. Officials and oil executives have been split on the need for cuts with Dmitriev and Alexander Novak,  Russia’s energy minister supporting cooperation while the head of Kremlin oil major Rosneft, Igor Sechin, has criticised the cuts as providing a lifeline to the less competitive U.S. shale industry. President Vladimir Putin has said little since the OPEC+ deal collapsed, Reuters report said.

However, Friday, an official from Saudi Arabia’s energy ministry said, referring to the wider grouping of oil producers. “There have been no contacts between Saudi Arabia and Russia energy ministers over any increase in the number of OPEC+ countries, nor any discussion of a joint agreement to balance oil markets.”

Saudi Arabia may soon be under pressure from the U.S. to return to the negotiation. The Kingdom’s latest move to flood the oil markets with larger volumes and cheaper oil which triggered an oil price war and the crash has put President Donald Trump in a difficult situation because it has undermined the U.S. shale industry, which has much higher costs than Saudi or Russia production.

Already a group of six U.S. senators wrote a letter to Secretary of State Mike Pompeo last week saying Saudi Arabia and Russia “have embarked upon economic warfare against the United States” and were threatening U.S. “energy dominance”.

They called on Saudi Arabia to quit OPEC, reverse its policy of high output, partner with the United States in strategic energy projects or face consequences. These are some of the early signs that the two biggest oil exporter may soon be forced to return to the negotiation table to fix oil markets collapse.

Additionally, the cost of oil price and volume wars in the global oil market is growing for both Russia and Saudi Arabia, countries with bigger fiscal and financial buffers than Nigeria has.

Russia’s revenues from oil and gas are estimated to be US$39.5 billion (3 trillion rubles) lower than planned due to the tumbling oil prices, according to Anton Siluanov, Russia’s minister of finance. This means that at the current oil prices, of below $30 a barrel, the Russian economy will tip into a deficit, albeit a moderate one at 0.9 percent. The Russian budget, according to the finance ministry, was balanced at a price for the Urals blend of $42.40 a barrel.

According to Fitch Ratings, Saudi Arabia needs oil prices at $91 a barrel in 2020 to balance its budget, all else being equal.

For Saudi Arabia, at $30 and below a Brent barrel, the country’s wealth fund will deplete fast and lead to reduced government spending. This will in turn stall projects, bad news for an already suffering private non-oil sector. That is the near-term damage.

The longer-term damage is the lack of funds for the ambitious Vision 2030 plan of Saudi Crown Prince Mohammad bin Salman, which was already going downhill even before the oil price collapse as the promised multi-billion foreign investment and Saudi investment in “diversifying away from oil” were not exactly flowing to the Kingdom, Tsvetana Paraskova, an energy analyst at oilprice.com said.

It is now a game between Saudi Arabia and Russia of who will blink first, and in this game, the Saudis seem to have overestimated their fiscal buffers and underestimated the coronavirus-hit enormous demand destruction, Paraskova observed.

No country is more at risk than Nigeria, a country where oil accounts for 96 percent of exports and over 75 per cent of government revenues; a country that has absolutely no resilience to oil price shocks.

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