Just when the oil markets needed a bit of cool thinking and a longer term perspective, Organisation of the Petroleum Exporting Countries (Opec) and Russia have embarked on diametrically opposite routes.
The fallout was there for all to see — oil prices crashed more than 20 per cent to around the $30 a barrel mark. “Cheap” oil is not the solution the global markets were searching for during a global pandemic and when a recession seems just a quarter or two away.
As the chief of the World Health Organisation said last week, markets need to react calmly to the Coronavirus crisis, Opec and Russia need to work together- as they have successfully been doing in recent years, to set a base level for oil production and, by extension, prices and market stability.
Sure, price stability meant that US shale producers also came along for the ride. But the intention was clear – create an environment for price stability. And that goal was achieved.
As the chief of the World Health Organisation said last week, markets need to react calmly to the Coronavirus crisis, Opec and Russia need to work together- as they have successfully been doing in recent years, to set a base level for oil production and, by extension, prices and market stability
The global economy could have easily absorbed another production cut, as was championed by Saudi Arabia and other key producers in the Opec grouping. That Russia chose not to is downright unfortunate.
There’s always a degree of political self-interest when it comes to oil … and has historically been the case. But this was not the moment for either side to rule out a mutually agreeable outcome. It will only set off a race to the bottom for oil prices … and then everyone fails.
It’s unrealistic for Russia to even believe that an all-out price offensive can wipe out the US shale industry. However much Russia thinks it can do this alone, it should not lose sight of the bigger picture — and stable oil is needed for a global economy to put back lost growth momentum.
Russia is not without friends in the Middle East … oil at $30 will hurt their interests as much as anyone else’s. For the greater good, Russia and Saudi Arabia need to reconnect on an oil deal.
Short-term differences must not cloud the fact that a lot was achieved through such a détente all through the last four years. Memories cannot be allowed to run this short.
Otherwise, investors and the markets will punish them — Monday’s 25 per cent decline was just a sampler of what could be in store. At a time when the bourses from New York to Hong Kong are already slumping on the fears of coronavirus, an oil war is the last thing the world needs.