Who is to blame for Black Monday?

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Last Friday’s meeting of oil ministers from the Organization of Petroleum Exporting Countries (OPEC) and their international allies was in commotion. The collapse of the discussions reveals a deep disagreement over how to deal with the drop in oil demand caused by the spread of the Covid-19 virus.

Saudi Arabia demanded that Russia should participate in the proposed reduction of another 1.5 million barrels per day, insisting that OPEC would not cut supplies without the support of non-member countries. However, Russia abstained.

Nevertheless, this meeting was not only for the purpose of agreeing on a further reduction in production. It was also planned to ratify the extension of the current agreement between 20 countries on the removal from the market of up to 2.1 million barrels of oil per day. This deal, reached in December, will become invalid at the end of this month, and members are free to download as much as they wish from April 1.

And this is exactly what Saudi Arabia is preparing to do. After the meeting was unsuccessful, the state oil monopoly Saudi Aramco slowed down the setting of official prices for April.

In addition to Saudi Arabia, which can add over 1 million barrels very quickly, the only countries that can increase production by more than 100,000 barrels per day are the United Arab Emirates and Russia.

According to other countries, Russia did not refuse further reductions in production just because Russian oil companies did not want to pump out a little. In the end, Russian oil companies have not yet fulfilled their obligations. The second assumption is that by allowing oil prices to drop, Russians can hope to stimulate demand. It is difficult to understand that this greatly affects consumption, although when factories are closed, airlines reduce the number of flights and roads are emptied. In this regard, cheap oil will not ease the fear of the Covid-19 virus.

However, this could lead countries such as China and India to build up their strategic reserves. Both create buffers, similar to the US Strategic Petroleum Reserve, to protect themselves from any future supply disruptions. It seems that China is already pouring a huge amount of oil into reservoirs and underground caves.

Crude oil flows from the Gulf countries declined from their record level in October, but are still in trend with supplies since the beginning of 2017. Volumes from West Africa also hold. And amid falling oil consumption, China has become the largest buyer of oil from the Kurdish region of Iraq.

On the other hand, there is also a geopolitical dimension in Russia’s withdrawal from the pact to reduce production, as in the case of its accession. This is the restoration of Russia’s influence in the Middle East. The conclusion is aimed at punishing the United States for its repeated attacks on Russia’s energy interests with the help of sanctions that stifle the development of the Arctic shelf and the development of shales, prevent the completion of the gas pipeline to Europe and much more.

Thus, Saudi Arabia has decided to increase oil production up to 10 – 12 million barrels per day to put pressure on Russia and force agreements on oil production.

On Monday, WTI crude oil opened at $ 33 and plummeted to to 27.5 in the morning:

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The last time such prices were in 2015. This is a disaster for exporting countries but for speculators, this is a blessing.

The material has been provided by InstaForex Company – www.instaforex.com

Source:: Who is to blame for Black Monday?

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