Saudi Arabia, led by OPEC+, played along with Donald Trump, who hit oil prices with the announcement of duties on goods from other countries. Riyadh wants to bring to the negotiating table the violators of the OPEC+ deal who exceed the established production quotas, but the effect may be reversed and the entire blow will have to be on shale production in the United States, Bloomberg writes.
"History does not repeat itself, but it often rhymes — take, for example, Saudi Arabia, which is pushing OPEC to increase production, seemingly to pacify the violators of the OPEC+ deal," writes columnist Javier Blas. He is referring to the statement by OPEC+ that in May the parties to the deal will continue to increase production and decided to triple the planned growth to 411 thousand barrels per day.
Bloomberg notes that current events have many parallels with 1997, when the financial crisis flared up in Asia, and the OPEC meeting in Jakarta ended with a strong increase in oil production.
"Few people expected how ugly the combination of additional production and a slowdown in the economy would be. A year later, oil prices fell below $ 10 per barrel, and this political mistake has forever remained in the memory of OPEC as the "ghost of Jakarta," Javier Blas continues.
He believes that today the seeds of global economic turmoil are only being sown.
"But there are many parallels, including the fact that the oil market turned out to be weaker than the one in which many wanted to believe. If history teaches us anything, we are far from the bottom of the oil market. The combination of higher oil production within OPEC+ and the likely impact of the US trade war on oil demand has led to the fact that commodity prices have fallen to the level of 2005," the Bloomberg observer notes.
He believes that both the White House and Saudi Arabia are pleased with the drop in oil prices since Donald Trump announced new duties on goods from other countries.
"So don't bet on any of them getting involved. Trump needs lower oil prices to offset the inflationary impact of the trade war. And make no mistake, the will and intention of the Saudis last week was to push oil prices down. For a while. That's why they scheduled an impromptu meeting to announce an increase in production (OPEC+) a few hours before Trump started his trade war, knowing that this would maximize the bearish signal. Did the Saudis want to teach a lesson to OPEC+ violators such as Kazakhstan, Iraq and The United Arab Emirates, or they meant Trump, is unclear. Based on conversations with OPEC+ officials, I believe that both factors played a role," Blas writes.
In his opinion, it would be a mistake to consider 2025 through the oil price war that occurred in 2020 between Saudi Arabia and Russia. Then prices fell below zero.
"And yet a 2020-style price war makes more sense than what Riyadh is doing now. The intention of Saudi Arabia at that time was to create as many financial problems as possible in the shortest possible time, and to bring everyone to the negotiating table as quickly as possible. The Saudis got what they wanted: the war lasted 35 days. This time they risk getting the opposite effect. The financial difficulties of the current low prices are real, but not so acute as to force OPEC+ violators to negotiate. The opposite is true: those who are already cheating will be tempted to double down, mining even more to compensate for some of the lost revenue," Bloomberg said in a publication.
The current situation may lead to a rebalancing of the oil market and a decrease in consumption growth, which is still estimated at 1 million barrels per day in 2025. And in this situation, none other than American shale oil companies will be hit.
"It's been less than a week since the (price) crash started, but my industry research shows that most shale companies are already planning to cut costs and not only them. Some of the producers have already been warned about this by lenders, who demand to immediately reduce drilling in order to avoid violating credit covenants," Javier Blas cites data from a March survey of companies by the US Federal Reserve Bank in Dallas. The miners said that an average West Texas Intermediate (WTI) price of $65 per barrel is needed for profitable well drilling. On April 8, it is trading at $61.1.
"Finally, don't forget about psychology. The history of two price wars that led to ultra-low prices has remained firmly in the institutional memory of oil trading platforms: the one that Saudi Arabia launched at the end of 2014 against the US shale industry, and the one that pitted Saudi Arabia against Russia in 2020. In the first case, WTI fell below $30 per barrel. In the second case, American oil fell to a historic low of minus $ 40 per barrel. It is not surprising that today everyone is trying to hedge (insure) the downside risk with the help of options, the trading volume of which has grown sharply. Given this historical background, I don't think many will try to catch a falling knife," concludes Javier Blas.