Sharp Drop in Oil Prices in the World Market

10 m.   |  2020-04-20

In March, world oil prices hit a record low of $23.1 for Brent oil, $13 for Russian Urals and $20 for American WTI the last 20 years. Main reason for this situation was the disagreements on the oil exports restrictions to the largest oil exporting countries within the framework of OPEC+, on March 5.

There were views, that OPEC+ has exhausted itself and a new agreement won’t be signed, however on April 9, after a month of complicated discussions, they decided to make some concessions.


Table 1. Brent oil price fluctuation between March-April

The three-year cooperation of OPEC+

T his year OPEC (Organization of the Petroleum Exporting Countries) international organization will celebrate its 60th anniversary. The main goal of the organization of the oil exporting countries is to coordinate and unite the oil policy of the member states and ensure the stability of the oil markets. The main purpose of its creation was to oppose the “Seven Sisters”: British PetroleumExxonGulf Oil, Mobil, Royal Dutch ShellChevron and Texaco Western organizations, which between 1940-1970, took over most of the oil exports.



Five founding states of OPEC, Iran, Iraq, Kuwait, Saudi Arabia and Venezuela, were trying to reduce dependence on Western oil and gas companies and generally on the West itself. Currently OPEC has 13 members. Algeria, Angola, Congo, Gabon, Ecuador, Guinea, Libya, Nigeria and UAE joined the founding countries. About 81.5% of the world’s oil mines belong to them, however, they export only 35-44% of oil annually. The main reason for it is the technically insufficient development of Western countries and Russia. Since 1982, OPEC has officially introduced a quota for oil production for member states, whose balance was entrusted to Saudi Arabia.

Having a huge reserve of oil, OPEC has a great influence on the pricing of the international market. Since the very beginning, the organization tried to establish relations with major non-member oil exporting states, so as to maintain balance in the market.

OPEC+ was the unification of OPEC members and 11 non-member states, including Russia, Azerbaijan and Kazakhstan around the oil export volumes, which is sometimes unofficially called the Vienna Agreement. It was signed on December 10, 2016, the main reason for which was the oil price fall, when it reached $30 in 2016. After long negotiations OPEC+ was established, the member states of which undertook to reduce oil exports.

According to the first agreement, OPEC+ should reduce its daily export by 1.7-1.8mil. barrels, 1.2 mil. of which by OPEC member states and 558mil. by other countries. Russia was obliged to reduce oil exports by 300 thous. barrels. This decision entered into force in 2017, and the next reduction was in December 2018, when it was decided to reduce exports by 1.2 mil. barrels, 800 thous. barrels of which by OPEC+ member states and 400 thous. barrels by non-member states. Russia was pledged to cut 228 thous. barrels of its 11.4 mil. barrels of oil exports. The last such decision was made in 2019, when it was decided to reduce oil exports by 1.7 mil. barrels by the first half of 2020.

However, the main role-players (Russia and Saudi Arabia) of the meeting on March 6, 2020 had different positions. Moscow wasn’t ready for the export reduction, while Riyadh offered to reduce the exports by another 1.5 mil. barrels due to the oil demand decline because of COVID19 global epidemic. By the way, Russia has already reduced its oil supply to China, but didn’t agree to the reduction. Russia didn’t envisage such a scenario and the purpose of the meeting was just to extend the agreement under the same conditions. The Russian side proposed to make changes in exports only in the second half of the year, when it will be clearer how the coronavirus global epidemic will affect the world economy. Because of the disagreement between the two sides, OPEC+ agreement was suspended indefinitely. Saudi Arabia, which was exporting 9.7 mil. barrels of oil at that time, also made no concessions, moreover, after failed negotiations, Riyadh began a price war by making oil exports to 12.5 mil. barrels, which he sold at a maximum discount during 20 years. As a result, on March 9, the Brent oil price dropped by 30%, becoming $31. A number of discussions began, so as to save OPEC+, which has stabilized the oil market for already 3 years. All the attempts failed in March, and the oil price reached about $20.

The US Response

I t’s logical, that one-month crisis of OPEC+ was resulted by the Russian-American oil, as by reducing the oil volumes Russia would allow the US to export more oil. No wonder that President Putin and Russian Energy Minister Alexander Novak initially stated, that the oil market requires joint actions, to which Russian oil companies are ready to go, but only with OPEC+ and with large oil producers, such as the US. 

Russia expected, that the countries which export a total of 70 mil. barrels of oil per day, will join the new agreement of OPEC+. Among such countries were Brazil, Norway, Canada and the USA. However, from the very beginning, the United States not only refused to join the OPEC+, but also blamed the parties for the created situation. Donald Trump threatened Russia and Saudi Arabia to use his leverages, but currently he tries to “find something mediocre”. By saying the leverages, the president first of all meant the sanctions, which in recent years have become its main tool of restraint in relations with Russia. There were rumors, as if Moscow and Riyadh fail to reach a new agreement, the US will stop providing military assistance to Saudi Arabia and will impose new sanctions on Russia’s energy field.

It’s quite obvious, that the oil price is not in the interest of the United States as well, which has increased its crude oil exports by 5 times between 2007-2013, by becoming the third largest oil exporter. In 2019, the USA exported about 543 mil. tons of oil, Russia exported 554 mil. tons.



Some experts believed, that in 2020, the US would overpass Russia with its exports, however this year, before the fall in oil prices, American oil companies had some problems, and small companies generally fed up with over-lending. Therefore, the drop in oil price can finally feed these companies. This didn’t made Donald Trump to take over the restrictions of OPEC+ either, noting, that American companies have automatically reduced oil exports, and called OPEC an illegal monopoly, which destroys itself.

However, in parallel with these statements, began Thrump’s phone calls between President Putin and Saudi Arabia’s King Salman bin Abdulaziz Al Saud since April 1, after which oil price rose from $30. Already on April 10, OPEC+ and a number of countries came to an agreement.

“New” OPEC+

T he month-long negotiations, as well as the accusations and demands of the parties came to the end on April 10. As a result of long-distance negotiation on April 10, OPEC+ countries agreed on new conditions, restarting OPEC+ after a month break.

As a result of new agreements, OPEC+ was obliged to cut the exports by 10 million barrels a day, which makes 10% of the oil supplied to the world market, and 4 mil. barrels to those countries, which will help to overcome crisis , including the United States. These conditions will last 2 years. Oil exports will be reduced by 8 mil. barrels for the next six months and by 6 mil. barrels in 2021. Russia will cut oil exports by 2.5 mil. barrels a day, which will enter into force on May 1 this year and will end on April 30, 2021.  The only country of OPEC+, which refused to reduce the oil volumes to the specified amount, and stated that instead of the 350,000 barrels it will cut 100,000 barrels, however Washington stated that he is ready to cut another 250,000 barrels of oil in support of Mexico. G20 conference, which took place on April 11, was also dedicated to the regulation of oil prices. It was decided at this meeting that a monitoring group will be set up to take measures for regulating the oil market, and the next meeting will take place in September.

It’s obvious, that as a result of the new agreement oil prices won’t go down again, but it is pointless to expect them to reach $40-60 immediately. The recovery of the oil market will probably be in the second half of the year.

Expected Consequences

H ow much would the price affect Russia’s economy, if the parties failed to “save” the OPEC+ agreement, as a result of which the oil price rose from $30 to $45 in the end of 2016, and $70 in 2018. Russia’s budget revenues increased by 6.2 trillion rubles in 3 years of OPEC+ existence. Furthermore, about 45% of the revenues comes from oil sales. The opposition and generally the West often emphasize that Russia’s economy is “sitting on an oil needle”. Hence, the Russian authorities try to reduce the country’s budget dependence on oil, by distinguishing it. In 2019, the oil revenues fell by 4% becoming 40.8%. It is attempted to reach it 35% in 2020. The Minister of Finance Anton Siluanov stated, that in case of such a level of prices, Russia’s budget would be reduced by 2 trillion rubles. Minister noted that if the current energy price does not change, they would have 1% drop in GDP instead of the planned 0.8%. It is also stressed, that Russia has international reserves of $570 bil., however it is unlikely that it will be used. According to the stress-scenario proposed by the Russian Bank in 2019, if the oil price reached $20 in 2020, the GDP will decrease by 1.5-2%. According to some experts, Russia would endure these prices at least 18 months, however, the successful negotiations of OPEC+ didn’t allow the implementation of such a scenario.