In early March 2020, OPEC has failed to reach a deal with Russia who refused to reduce its oil production in response to the plummeting demand due to the global coronavirus epidemic. “We are confident that Russia will resume its cooperation,” said OPEC’s Secretary General Mohammed Barkindo to a Russian news agency Interfax. According to the latest forecast by the International Energy Agency, 2020 will see a significant drop in global demand for oil, for the first time since 2009.

During the March 6, 2020 negotiations, OPEC members proposed to not only extend the current quota on oil productions through the end of the year, but also suggested to further reduce daily outputs by 1.5 mln barrels. Russia, however, was willing to extend the current quotes only through the end of the second quarter of 2020, and refused to further reduce production (a measure that is seen by OPEC as necessary for sustaining the current level of global oil process).

OPEC+ has sought to stabilize global oil prices since 2017. The OPEC failure to reach a deal means that, starting with April 1, 2020, there will be no limitations on oil production. Following Russia’s rejection of a new deal limiting oil production, Saudi Arabia announced its intention to increase output in April. The reaction of global markets to the prospect of a new energy price war was instantaneous: within a few seconds from the morning opening on March 9, 2020, Brent oil prices fell 30%, its biggest drop since 1991. Russian national currency – ruble – was immediately affected – its exchange with euro exceeded the 86 to 1, and with the US dollar – 75 to 1 rate.

“At this point there are no factors that would limit the drop in oil prices. Under an optimistic scenario, they may stabilize at $30 per barrel, after which the markets may start recovery,” believes Nikolai Ivanov from the Energy and Finance Institute (Moscow, Russia). However, according to a recent Goldman Sachs projection cited by the CNN, due to perturbations on the global oil market the price can go down as low as $20 per barrel.

The deficit in the Russian federal budget that would result from the drop in oil prices can be compensated by the National Wealth Fund, announced the Russian Ministry of Finance statement on its website (as quoted by a Russian news agency RIA News). The Ministry projects that even under a pessimistic scenario with prices at $25 per barrel, the Fund will last for six years.

In his statement to a Russian news agency TASS, Energy Minister Aleksandr Novak said that the prospect of oil production increase in April will be determined by ROSNEFT’s plans. Following the failure to reach a deal with OPEC, Russian State Corporation ROSNEFT (currently under sanctions by the US and EU) began planning to increase its oil output, according to Bloomberg reports citing insider sources.

“I doubt that Russian officials, who are now in the midst of a constitutional reform and government restructuring, meant to intentionally harm the Russian economy and weaken the national currency,” says Nikolai Ivanov. Ivanov believes that Russia was forced to break off its negotiations with OPEC. “On the one hand what happened was a manifestation of domestic political intrigues in Saudi Arabia; on the other hand, one can detect the U.S. influence,” said the expert. “The US Secretary of Energy Mike Pompeo flew to Riyadh, Saudi Arabia right before the OPEC break down. The young and very capable Crown Prince bin Salman had just averted a coup in his country and arrested several key government figures. He had conducted an IPO round for Saudi Aramco and no longer had any motivation to sustain oil prices.” For Russia, on the other hand, new production quotas would mean a reduction of half a million of barrels per day. “Unlike Saudi Arabia, Russia, due to its geological characteristics cannot quickly reduce the production of oil and then ramp back up,” believes Nikolai Ivanov. “For Russia, with its high share of “old” oil deposits, which actually already require intensification of extraction rates, it is impossible to increase production after a forced decrease.”

“This decision could have only been made by Vladimir Putin personally,” asserts Mikhail Korchemkin, Director of the East European Gas Analysis consultancy. He recalls Gazprom’s unfortunate experience from the 2009 crisis. As gas prices in Europe plummeted, the Russian President decided to keep the contract prices high despite a shrinking market share. “I would imagine, today, Putin is applying this past experience to the oil market. In 2009, he learned that a reduction in exports leads to a loss,” suggests Korchemkin. “However, shortly thereafter Gazprom came to its senses, lowered prices, increased its market share,” recalls Korchemkin. Aleksandr Baunov from the Moscow Carnegie Center agrees with this assessment. Baunov believes that a shrinking market and its restructuring are the two major factors. “The rest is just an afterthought: the prices first started dropping, and then the government recalled that it was bad for the shale industry,” he suggested. Korchemkin also notes that the US shale oil production has lived through two major price shocks of 2009 and 2015, each deeper than the current one so far.

“Russian leadership still does not understand the US shale mining industry,” – says Ivanov. The expert is confident that this sector cannot be shut down by external shakeups. “Production volume can be varied. Profits are realized even under modest volumes of extraction,” he explains. According to Ivanov, the US may even decide to increase output despite lower global prices as certain costs can go down through such periods. “The United States has such a diversity of producers – at the major, medium and smaller size levels. They can diversify their investments. The advantage of shale production is that it’s very dynamic, and one can adjust approach to oil extraction based on demands of the market,” concludes the expert.

According to Robert Tummel, a portfolio manager at Tortoise Capital Advisors, currently the impact of coronavirus on global oil demand is uncertain. Estimates for 2020 for global oil demand reduction range from 600,000 to 1.3 mln barrels per a day. “Global oil supply could increase by 500,000 to 1 mln barrels per a day, based on how much Saudi Arabia increases production. And that will result in an oversupply on global oil market between 1.1 and 2.3 mln barrels per a day,” predicts Tummel. According to his estimates, the market is going to oversupplied by 1% to 2%. “We think that the US oil producers are most likely to accelerate the capital discipline, and they’d already began doing one to two years ago. The US production is likely decline if low oil prices persist,” says Robert Tummel.