The coronavirus is a new and bigger challenge to the industry, and that challenge was briefly magnified when Russia last month refused to go along with Saudi Arabia in cutting supplies. Russian oil executives said they were tired of losing market share to American producers. Saudi Arabia retaliated by promising to pour more oil on the market, taking prices to roughly $20 a barrel for a time, less than half the level at the beginning of the year.
The decision by Saudi Arabia to put an additional 3 million barrels a day on the market was a huge gamble that backfired, and it is possible oil prices will sink again in the coming days if traders are not satisfied with the cuts announced by Saudi Arabia, Russia and their alliance partners. In fact, on Thursday, the last day that oil futures traded, the price fell sharply even though the producers were close to a deal.
Behind all the blustery wheeling and dealing, Saudi Arabia did succeed in bringing Russia back into the fold of an alliance of producers called OPEC+. But caught off guard by the size of the price drop, both Saudi Arabia and Russia needed to reverse course and make supply cuts to prop up crude prices.
“There were miscalculations on both sides,” said Ben Cahill, a senior energy fellow at the Center for Strategic and International Studies. “The Russians miscalculated how sharp the Saudi response would be and they might have been taken aback by how deep the price drop was.”
“Saudi Arabia will have big budget deficits, they’ll have to issue a lot more debt, they’ll need to run down their reserves, and the longer this cycle goes on, the more destructive it is,’’ Mr. Cahill added.
With the pandemic crushing economies around the world, few buyers were available in recent weeks to buy the cheap Saudi crude. The kingdom stored some oil in Egypt and was forced to let unsold crude sit in tankers along its coasts.
The mounting glut became a threat to Saudi government finances. At a projected average price of $34 a barrel this year, the Norwegian consultant Rystad Energy estimated, the kingdom’s revenues would be 50 percent lower than in 2019, a loss of $105 billion.