Experts: Oil war between Russia and Saudi Arabia may benefit both
The price confrontation between Russia and Saudi Arabia in the oil market, which began after the collapse of the OPEC+ agreement, may drag on for a long time. Both countries are able to survive even at prices well below $30 per barrel, according to experts interviewed by TASS. If the situation persists for a year or two producers of more expensive oil might be squeezed out of the market, for example, shale companies, and the market will be balanced, analysts said.
Saudi Arabia may reach production level of 12 mln barrels per day (bpd) in 3-6 months, Director of ACRA corporate rating group Vasily Tanurkov said. In his opinion, increasing production capacities by 1 mln barrels to 13 mln will not happen right away, but "most likely by 2021." "But even if production reaches 11 mln barrels, this is already a quite negative situation for the market," he noted. In total, OPEC countries can increase supply by 3-5 mln bpd starting from April, the expert added.
Saudi Aramco itself, given the particularities of its fields, can safely produce oil and at $15 per barrel "not just for a long time, but almost forever," analysts said. However, the economy of Saudi Arabia is oil-dependent and low commodity prices threaten the kingdom with a serious budget deficit. It can compensate for lost income through reserves, borrowings, and even the devaluation of the national currency, experts said.
Nevertheless, Saudi Arabia can live off the price of $30 per barrel for several years, despite the high fiscal equilibrium point of about $80 per barrel, Director of corporate affairs at Fitch Dmitry Marinchenko said.
Russia is also ready for a period of low prices even "better than other countries," Russian Finance Minister Anton Siluanov told reporters recently. According to him, Russia will not reduce the expenditures adopted in the budget. The oil industry is able to withstand volatility over a long period, according to the recent comments by Russian companies. Under the influence of factors such as coronavirus and recession, the price of oil "would still fall to $35 per barrel" and "the role of the OPEC+ agreement should not be overestimated," Gazprom Neft CEO Alexander Dyukov said.
Russia has deposits where production costs are very low due to the proximity of transport infrastructure, Tanurkov said. "But in general, if oil prices are not below $20 per barrel for a year or more, then our oil industry will survive and even be able to invest," he said.
However, experts believe the scenario in which the price will remain at this level for a long period is almost unreal, because it will lead to the bankruptcy of not only shale companies in the United States, but also manufacturers in China, Brazil and Europe. "We cannot rule out that oil will drop below $30 per barrel, as it did at the beginning of 2016. But this level is not comfortable for anyone and therefore unstable," Marinchenko explained.
"The next years or two we can withstand, including companies. If many of our oil companies lobbied for a way out of the deal with OPEC, then obviously they are ready. They understand their profitability, they understand that they can get tax benefits. Moreover, profitability of our companies does not depend on oil prices, but on the dollar," Senior Researcher at the Institute of Economic Forecasting of the Russian Academy of Sciences Andrey Kolpakov said.
In the last two years, thanks to the work of the OPEC+ agreement, the Russian oil sector has been making record profits, which were difficult to use effectively in the face of restrictions. Thus, due to the accumulation of these funds and high dividends, companies and their shareholders created an airbag that will allow them to survive for quite some time, analysts explained.
The price war of the two largest oil producers could hurt other countries where production costs are larger, such as the United States, China, Brazil and Northern Europe, analysts said. In the long run, a price war may turn out to be beneficial for both Russia and Saudi Arabia, as it will help cut out competitors. However, this will work if the United States does not begin to protect its shale industry by political and other methods, experts believe.
"If the United States introduce anti-dumping duties on oil, which will support shale companies and protect them, then this is the most negative scenario for us, and for the Saudis, and for the market in general," Tanurkov said. If Washington does not follow up with tough defensive measures, then shale companies will begin to lose market share over time, he added.
If former allies continue to increase production over last the next couple of years and shale producers leave, the market will be able to balance itself out in 2-3 years, experts said.
"However, there will be no winners in this war. It can take a lot of time for shale companies to leave. And it is highly likely that such estimations will be too optimistic. It can turn out the other way around," Tanurkov concluded. "It is better to avoid any wars, including trade wars. Besides, we ourselves don’t quite understand who we are fighting in this situation - shale oil or Riyadh," Marinchenko said.