Global risk after oil prices drop by more than 20%

Global risk after oil prices drop by more than 20%

Despite the global focus on the threat of the spread of the Coronavirus, another fear is emerging in the Asian market as oil prices drop by more than 20%.

The French newspaper "La Tribune" said that the drop in the price of a barrel of oil to less than $ 20 will not pass without consequences, and attributed this rapid deterioration since last January to a double shock: a demand shock exacerbated by the impact of the Corona pandemic on the economy, and a supply shock due to the conflict between Saudi Arabia and Russia.
Where OPEC, the Organization of Petroleum Exporting Countries, 3 days ago failed to persuade Russia to propose significant production cuts to stabilize prices damaged by the economic consequences of the Corona virus, OPEC responded by abolishing restrictions on its oil production.

For the sake of clarity, the Organization of Petroleum Exporting Countries and its ally Russia earlier worked to impose restrictions on production, but the situation has now differed after the lack of agreement among them, to drop oil prices by 30% since last Friday.

Saudi Arabia and Russia

After Moscow refused to cut its oil production, Riyadh's response was to lower the selling prices of its oil and increase its production sharply.

Although Saudi Arabia does not lose money if it sold oil at $ 20 a barrel because its production costs only $ 2.80, its government needs a price of more than $ 80 a barrel to balance its budget and implement its ambitious plans to diversify the economy, according to the French newspaper report.

As for Russia, where production costs are much higher than $ 20, it can balance the budget at a price between $ 40 and $ 50 a barrel.
La Tribune

The newspaper believes that the first result for Western oil companies is a sharp decline in the stock market, as its shares have declined since the beginning of the year to between 50 and 60%.
Keeping the price of a barrel at $ 20 now threatens its profitability, and it may translate into a sharp drop in investment spending in the short term, pending the recovery of prices, as the newspaper sees.

And if prices do not rise, it will certainly appear difficult to pay the generous profits to the shareholders, and the room for maneuver will be narrowed to prevent further decline in the stock market. However, the most catastrophic impact will be on oil service groups that will suffer from low investment.

Away from the three giants in the market (Saudi Arabia, Russia, the United States), lower prices can have far more dire consequences for other producing countries, especially for emerging countries whose budget depends heavily on oil-related revenue.

And if prices do not rise quickly - according to the newspaper - then all these countries will have to take severe austerity measures, which may lead to social crises, or even political crisis.