opec-plus-and-the-crashing-of-oil-prices

OPEC Plus and the crashing of oil prices - The oil prices saw their biggest single-day fall in almost 30 years recently, throwing global equity markets into turmoil. 

More about the news:

  • The price of a barrel of Brent crude closed down 24% at $34.36 after a price war was initiated between Saudi Arabia and Russia, two of the world’s largest oil producers. 
  • At present, Brent crude price was hovering around $33 a barrel. 
  • Prices crashed by almost 50% this year, from $66 a barrel on December 31, 2019, to the current levels, primarily driven by lack of demand.

The OPEC-Plus alliance

  • OPEC Plus arrangement: As Russia is not a member of the Organisation of Petroleum Exporting Countries or OPEC, this alliance kept production lower and pumped up the prices.
  • When: After the 2014 glut, diplomacy which brought down prices below $30 a barrel, Saudi Arabia and Russia came together to cut output and steady prices.  
  • Current status: The OPEC-Plus cooperation collapsed recently after Russia rejected a Saudi request to effect more cuts in output given the fall in demand owing to the economic impact of the coronavirus outbreak. 

Possible impacts: 

  • Crashing oil prices: Saudi Arabia’s oil giant Aramco announced that it would increase output and offered a discount to its variety of crude, targeting Russian markets in Asia and Europe. The fear of glut at a time of slowing demand (supply and demand shock) rattled the markets, crashing prices.
  • Bring back Russia to the negotiation table: As it was clear that Russia was not ready to cut its output further, the Saudis moved to the attack mode by exerting pressure on Russia and make it come back to the negotiation table. 
  • Capture market: If the Russians do not blink, the plan is to capture market share from Russia with discounts.  
  • Bleed the U.S. shale oil producers: Who could not sustain production at depressed prices. 
  • In Saudi Arabia: Roughly 90% of Saudi budget revenues are coming from the petroleum sector. The Kingdom wants prices to be over $60 a barrel to balance its budget. Prolonged depressed prices will leave a bigger hole in the Saudi budget, complicating further the nation’s economic reform and diversification agenda.

Russia’s plan:

  • Russia is in a relatively stronger economic position than Saudi Arabia. Oil now accounts for less than a third of its budget revenue. The country has also built a $435 billion in foreign exchange reserves.
  • Russian may be looking for a long game - to weaken both the U.S. shale oil industry and OPEC's clout in the market.

Impact on India:

  • The oil import bill is the single-biggest entry in the current account to cause a deficit year after year. India imports nearly 85 percent of its oil requirements. 
  • In times of economic slowdown, a crash in oil prices can significantly reduce import bills and the government can save money that may be used to reverse the economic slowdown in India.
  • However, the past experience shows that the government raised excise duties on petrol and diesel to collect more tax. There is a concern that hiking duty on petrol and diesel may push inflation. 

About OPEC: It is a permanent, intergovernmental organization, headquartered in Vienna, Austria

  • Founder Members: The Organization of the Petroleum Exporting Countries (OPEC) was founded in Baghdad, Iraq, with the signing of an agreement in September 1960 by five countries namely the Islamic Republic of Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela. They were to become the Founder Members of the Organization.
  • Currently, the Organization has a total of 14 Member Countries.
  • OPEC’s objective is 
    • to coordinate and unify petroleum policies among Member Countries, in order to secure fair and stable prices for petroleum producers; 
    • an efficient, economic and regular supply of petroleum to consuming nations; and 
    • a fair return on capital to those investing in the industry.
  • OPEC membership is open to any country that is a substantial exporter of oil and which shares the ideals of the organization.

About Opec+

  • Opec+ refers to the alliance of crude producers, who have been undertaking corrections in supply in the oil markets since 2017.
  • OPEC plus countries include Azerbaijan, Bahrain, Brunei, Kazakhstan, Malaysia, Mexico, Oman, Russia, South Sudan, and Sudan.
  • The Opec and non-Opec producers first formed the alliance at a historic meeting in Algiers in 2016.
  • The aim was to undertake production restrictions to help revive a swinging market.

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