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Irina Slav

Irina Slav

Irina is a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry.

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The Real Reason Oil Prices Crashed


Here’s a quick question: what happens when a lot of people are producing more and more of a commodity, but fewer people want to buy it? It’s economics for preschoolers. You don’t even need multiple choice answers to guess right.  But here’s another, increased difficulty, question: whose fault is the current oil price crash?

If this were a multiple-choice question, the answers would look something like this: a. Saudi Arabia; b. Russia; c. The United States; d. The coronavirus outbreak; and e. All of the above. The correct answer, of course, is e., if we get past our personal preferences for a culprit. But how much did each of these contribute to the crisis? 

Now that’s a harder question to answer. 

Saudi Arabia used to be the world’s largest oil producer and, more importantly, the world’s cheapest oil producer. This has given the Kingdom a lot of leverage when it comes to controlling oil prices. Prices went where Saudi Arabia wanted, either by shutting off the taps or turning them up to gushing. 

It was the latter that the Kingdom did in 2014 when the U.S. began to make its oil presence felt internationally. The point was to stifle this emerging competition and retain the top spot both in production and clout. Unfortunately, it didn’t work out quite as planned. Prices tanked from over $120 a barrel to below $30 and everyone suffered, including Saudi Arabia itself.

Now, the Kingdom has once again turned the taps on to gushing. This time it wants to punish its partner in price control, Russia, for its refusal to cut a bigger chunk of its production to support prices, although some believe it has also had enough of U.S. shale and is targeting it, too. 

Prices, not known for being surprising, are reacting in the only way that can be expected.

So, Saudi Arabia fired the first shot in what everyone is now calling an oil price war. But did it really? Saudi Arabia announced its plans to raise oil supply to 12.3 million bpd from less than 10 million bpd on the Sunday after the OPEC+ meeting in Vienna did not take place because Russia singularly refused to cut deeper. But that was not all Russia, Russia’s Energy Minister Alexander Novak said.

Related: Gasoline Futures Fall To $0.50 As Demand Plummets
Novak also said on that fateful Friday that Russia would restore its pre-agreement production rates beginning in April. This would add some 300,000 bpd to current production rates or up to 500,000 bpd. While it’s true that 300,000-500,000 bpd is nowhere near the almost 3 million bpd that Saudi Arabia has threatened to add to the oversupplied market, Russia’s refusal to cooperate on the cuts was widely seen as the move that triggered Saudi Arabia’s response. What’s more, some believe the real Russia's real target was U.S. shale.

U.S. oil, and U.S. shale oil, in particular, has been blamed—or praised, depending on the perspective—for the change in the balance of oil power in the world over the last couple of years. U.S. shale is now a force to be reckoned with, boasting daily production of over 13 million bpd per the latest EIA weekly petroleum report.

This has turned the United States into the world’s largest producer of crude oil and has significantly increased its previously non-existent presence on international oil markets. While local production has not made the U.S. self-sufficient in oil, it has certainly reduced its dependence on imports and turned it into an exporter, competing directly with Saudi Arabia’s and Russia’s lighter grades.

Just how much U.S. shale changed the balance of oil power globally became evident gradually, as OPEC and Russia kept cutting production and prices kept refusing to rise because of sluggish demand outlooks but also because U.S. shale producers continued to pump more and more oil. While OPEC+ was cutting, shale boomers were boosting. 

This was bound to end badly.

Now, Saudi Arabia is pumping and shale boomers are retrenching, slashing spending and idling rigs. Debt repayments are looming and while many have hedged against low prices, how long the money will last is an open question, as shale producers, too, have been burning cash for months if not years. And it’s not like they weren’t warned. Continental’s Harold Hamm said in 2017, when prices rebounded, that U.S. shale should be careful not to drill itself into the ground. But here is history repeating itself. Only this time it’s worse because the world is gripped by a deadly pandemic.

Related: US Oil Turns Its Back On The Permian As Prices Crash

The viral outbreak that began in China in December had, by the time of writing, claimed almost 14,700 lives globally, infecting 339,000 people across dozens of countries, and effectively shutting down many of them. States of emergency have been declared, remote work and remote schooling is the new—hopefully temporary—normal and airlines are gasping for air. This is probably the worst oil demand shock the industry has seen in history.


Just how severe the effect of the pandemic has been on prices is easily seen in the oil price forecast revisions of investment banks. They started with $50 a barrel early this year when the virus began its march across China before it spilled out, and now some are predicting Brent could drop as low as $10 a barrel if the current situation continues. The world will simply run out of storage.

According to calculations by OilX, there are about 750 million barrels of oil in the world stored both on land and offshore. The oil analytics firm notes that this could rise to 1 billion barrels, according to some analysts, in the current demand and supply situation. 

It’s anyone’s choice who is most at fault. The facts remain: unless something changes quickly—and it won’t be the world’s epidemiological situation—oil is headed lower. On the plus side, this would help the economies hardest hit by Covid-19 to recover a little bit more easily.

By Irina Slav for Oilprice.com

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Leave a comment
  • Mamdouh Salameh on March 24 2020 said:
    You give too much credit to US shale oil production when, in fact, it has always been a minor player in the global oil market and will remain so until its demise 4-9 years from now.

    The real reason for the oil price crash lies solely at the door of the coronavirus outbreak.The outbreak has virtually halted almost all normal economic activities including global oil demand. This has augmented an already existing glut estimated at 4-5 mbd before the outbreak to an estimated 4.8-6.0 mbd now.

    In January this year just before the outbreak the global economy was projected to grow at
    3.3 % and global oil demand was projected to add 1.2 mbd over 2019. What has changed the projections? Obviously the advent of the outbreak.

    Soon the outbreak will be history with global oil demand and prices recovering all their recent losses.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • Pras Dhak on March 24 2020 said:
    Thank you Irina for this excellent article and a balanced perspective. Hats off to you. Unfortunately, some of the articles here at OilPrice on this topic over the last little while have come off as being ideologically driven.
  • Brett Blaikie on March 24 2020 said:
    While I agree with Dr. Salameh to a point it would seem like Russia was expecting something like this from Mr. bin Salman and there is no question the timing is very bad for US shale.
  • Arch Region on March 25 2020 said:
    A more parsimonious explanation is that oil produces are reading the writing on the wall. The toxic goo underground is quickly turning valueless and they are pumping it out as quickly as they can and is if there is no more tomorrow, because the odds are there will be no tomorrow.

    Tesla megafactories are like nails in the coffin of the fossil fuel economy.
  • Duffer Dan on March 29 2020 said:
    Good article explaining the politics of oil and how US shale has upset OPEC's control of the market and prices.

    The Coronavirus is giving us a window into the future of oil, declining demand, countries competing as demand dries up and prices near break even. What this means for those nations dependent on oil revenues is social and political turmoil. The middle east and Russia and a few other scattered nations have no plans for dealing with 60 to 90% oil revenue declines that are going to happen in the next 10 to 15 years, nor to they have any control to stop the culprit; the electric vehicle, whose sales are rising 50 to 100% per year and will in 10 years time represent 95% of vehicle sales.

    Knowing this investment in oil has already started to decline before the Coronavirus impact. High priced sources are the first to go of course, such as the Canadian tar sands. US shale will likely never return to it's heyday of the past year or two. But all sources of production will continue to see waning demand and thus production and revenue declines. Nations dependent on oil are in for lots of pain and the virus is giving us a snapshot into just what that will look like.

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