Ignoring the rules of the economy ... this is what the conflict between the belligerents left in the oil market

Abdul Hafiz Al-Sawy

One of the biggest mistakes committed by Saudi Arabia and Russia in their war on oil prices on the international market is that they believed that they had the keys to the game, and that they accompanied all the variables in the oil price equation, and undoubtedly the great ability to produce and pump it into the markets is an important factor, but it is not all factors.

The catastrophe of the Great Depression that the world economy experienced in 1929 was due to the behavior of the producers from the rule that supply creates demand, and since that date, the postulates of economic theory have changed, and the opposite has become true, that demand is the one who creates supply.

After the Director of the International Monetary Fund, Kristalina Georgieva, declared that the world economy has already entered a recession, it is evident that the policies of oil production and consumption have changed from before. To its normal levels or not.

Despite the apparent analysis of the price war crisis in the oil market between Saudi Arabia and Russia, as it pertains to the economic aspects of production, consumption, or supply and demand, the matter has its political background as well.

Russia’s reading of Saudi behavior relates to American interests, and Saudi Arabia’s keenness to reduce the production ceiling is in the interest of the American shale oil companies that have suffered great losses and even stopped production due to low oil prices. Russia’s view is that Saudi Arabia is fighting a proxy war.

Fall in price
And it seems that some expectations that the price of oil will reach and stabilize at the $ 20 per barrel barrier have become an elusive hope. Market prices on Monday morning, March 30, 2020 are $ 23 per barrel of Brent crude, and about $ 19.9 per barrel of US crude.

The news from China about its control of the epidemic did not succeed in moving prices in the oil market or even its cohesion. If the epidemic has witnessed a recession in China, it is largely launched in America, which has the largest economy in the world, and which controls the global oil market largely through its multiple companies. Nationality in the various investment fields in the oil market, or through its internal consumption data, or the balances of its strategic oil reserves, whose data control the oil prices up and down.

And the conflict in the price war in the oil market is nothing more than a fierce struggle. The ESCWA organization recently published on its website that the losses of the Arab region from the decline in oil prices during the period from January to mid-March 2020 amounted to 11 billion dollars, and if they continue Oil prices are low at $ 30 a barrel, which means losses to the oil-producing countries in the region, up to approximately $ 550 million per day.

And Russian Finance Minister Anton Celyanov announced in mid-March 2020 that his country's budget will lose about $ 39 billion in estimated revenues for oil exports during 2020, due to lower oil prices on the international market, and undoubtedly, the Russian budget losses will increase due to lower oil prices On the international market than it was in mid-March 2020.

The hard condition
Through what the media broadcasts by officials in both Saudi Arabia and Russia about the possibility of returning to what is known as "OPEC Plus" and agreeing to reduce the production ceiling, we found that both sides suspend this return on the impossible, because the Russian side requires the presence of other parties to agree with OPEC In addition to Saudi Arabia and Russia with this demand, it wants to weaken the Saudi position within OPEC, and OPEC will later become a card in the hands of Russia, not a counterpart.

While Saudi Arabia realizes the goals of the Russian demand and Saudi Arabia insists on returning to the agreement to reduce the production ceiling between OPEC and the producers outside - and above all Russia - to what it was before March 2020, and for the producing countries to go further to reduce the quantities of oil produced.

What we favor with this conflict is that it is in its infancy, and that the losses of both Saudi Arabia and Russia have not reached the pain stage yet, but the next six months period may be decisive in this conflict, and it will push the parties to the conflict to an agreement for several reasons, including: that the bill of losses will be greater than Their energy, and neither Russia nor Saudi Arabia will control other producers, due to the negative repercussions of the Corona pandemic crisis, and these countries will be forced to produce regardless of the Russian or Saudi demands.

Likewise, the possibility of medically arriving at a treatment or serum for the Corona epidemic is likely within the next six months, which would drive economic activity, thus improving oil prices, but it will not return to what it was before March 2020, but will remain at low rates. Within the limits of $ 30 a barrel for a period of time until economic institutions recover, and plans to stimulate different economies pay off, and be able to offset their losses due to Corona, and to accept other increases in the price of oil.

Thus, both Saudi Arabia and Russia will have to accept an agreement on the quantities of production, and reach acceptable prices, but it is too late.

Limited options
There are data issued by oil institutions that the refineries ’capacities are not able to absorb the surpluses of oil production, and that the crude oil stores have become lax and cannot absorb more, while Aramco CEO Amin Al-Nasser states that his company will pay the market about 12.3 million barrels per day in First April 2020, an increase of 300 thousand barrels.

This will not have an impact on the oil market except for more price falls, but the policy of insisting on flooding the market with more quantities than its energies has limits. So what is Saudi Arabia or Russia betting on?

The option of the major oil-importing countries cannot be wagered after they have sufficient balances of strategic oil reserves, and their storage infrastructure is no longer able to absorb other quantities, and those who rush to purchase after the price collapse at $ 30 a barrel feel great losses after having Prices reached below $ 25 a barrel.

Wrestlers in the oil price war will have no choice but to wager on developing oil-importing countries, and they naturally suffer two things. The first is the financing crisis. These countries will not be able to import large quantities of oil except through extended credit facilities, which provide them with long grace periods. In payment.

The second factor in the option of asylum for developing countries as an importer of excess oil by the conflicting countries is the lack of an infrastructure that allows developing countries to store, and from here if the producing countries accepted the extended credit facilities for the benefit of the importing countries, they would not help them to have an infrastructure that would enable them to do so. Limited.

The war on oil prices in the international market does not go beyond being an accurate description of the behavior of the underdeveloped countries in wasting their economic resources, which makes matters worse, that this war comes at difficult times for the economies of the warring countries.