What is behind Saudi Arabia’s war path with Russia on oil prices?

Saudi Arabia and Russia have been working together for many years to prop up oil prices, but last week they hit a patchy road over a disagreement on output production.  The reason was simple.  China, the biggest importer of oil, started turning back tankers as their economy was coming to a standstill due to COVID-19.  Oil prices crashed.  Many markets expert see oil prices going as low as $10.

 Saudi Arabia and Russia have the economic means to go against each other as they both have around $450B in foreign reserves. Foreign reserves are important, especially for Saudi Arabia which requires a barrel of oil at $82 vs Russia’s $42 to balance their budgets.

 What’s at the heart of the problem? The answer is two-fold: Russia’s frustration over American sanctions at its oil giant Rosneft and their failed attempts to collapse the US shale industry.

 Late last week, 23 countries including the US, Russia and Saudi Arabia agreed to cut oil production by 9.7mm barrels a day.  While that is a large number (13% of the world’s production), many believe it is too late, too late.  Oil consumption is expected to drop by as much as 30mm barrels a day in March, mostly due to COVID-19.  Oil prices dropped another 20% this week.

 Separately, it took 4 weeks to erase 23 million US jobs created in the last 11 years.  With a workforce of 160mm, this means 15% of the US workforce is unemployed, the highest level since the Great Depression.  Banks, which represent a good barometer of the overall health of the economy, reported dismal Q1 earnings this week.  Citigroup, Goldman Sachs and Bank of America all reported 40%+ declines in the earnings.

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