Russia and Saudi Arabia started an oil “war of attrition”

The price of oil, which on March 18 for the first time in 17 years fell below $25 per barrel, is catastrophic.

In an interview with RBC said co-owner and Vice-President of the largest Russian private oil company LUKOIL Leonid Fedun.

Россия и Саудовская Аравия начали нефтяную «войну на истощение»

On the morning of 18 March, press Secretary of the President of Russia Dmitry Peskov said that the current price of oil “definitely is low”. “I would like higher,” he said. At that time oil was trading below $28 per barrel.

At the end of February, oil traded for more than $50 per barrel. According to Fedun, the main reason for this collapse in oil prices — the collapse of the deal on the reduction of oil production OPEC+ due to the fact that Russia and Saudi Arabia on 6 March failed to agree on the terms of its extension, and then the Saudis announced their intention to increase the supply of raw materials on the market for more than 25%.

“Yes, now the fashion industry has hit the economy. But the oil shock that occurred from the collapse of the deal, OPEC+], it gives the price of about according to our calculations, from $20 to $25 minus from the current price”. If the parties managed to agree about prolongation of the transaction, a barrel of oil today would cost about $50, said the businessman.

According to him, at the meeting of oil companies with President Vladimir Putin, which took place a few days before the collapse of the OPEC agreement+, “no idea about the release [of Russia] from the trades have not been discussed.” “Although I know that some of the state companies it (the idea of the trade is OPEC+ — RBC) actively lobbied for. Even those who lobbied, didn’t in my worst nightmare imagine that will sell oil at $25,” said Fedun.

The first in support of Russia’s withdrawal from the agreement on controlling the production from Saudi Arabia and other OPEC countries was organized by the state “Rosneft”. “From the point of view of interests of Russia but this deal just does not make sense. We, yielding to their markets, remove them with cheap Arabian and Russian oil, to make room for the expensive American shale. And ensure efficiency of its production,” said RBC press-Secretary of Rosneft Mikhail Leontyev.

But, according to Fedun, the “negative situation” because of the collapse of the agreement will be Russia and Saudi Arabia, which has announced plans to increase oil production in a falling market. “And then the question of their economic opportunities, reserves and so on, there will be a war of attrition that will benefit the United States,” he said.

In the US the largest oil consumption and the direct dependence of prices on gasoline and diesel fuel from the cost of raw materials: the lower the price of oil, the cheaper gasoline. According to estimates of experts of LUKOIL, due to the low oil prices, the income of the American population will grow by 6%. But in Russia due to the peculiarities of the tax system even with the fall in oil prices doubled the cost of gasoline will not drop. “The population does not suffer from rising prices, but gets nothing from her fall. And the exchange rate, unfortunately, will fall, no clear reason why it did not fall further, no. Therefore, most likely, the real income of the [population of Russia] will fall,” warned the businessman.

In this case the price war is “do not kill, but wound pretty tight” shale production in the United States, said Fedun. In his opinion, production of oil shale will be abandoned for six or seven years ago. However, on those scenarios that are considered in LUKOIL, if Russia and the OPEC countries will fail to agree on a new agreement to reduce production and oil prices will remain in the range not higher than $35 per barrel, starting in 2022-2023 years, production in Russia will begin to decline, he concluded.

Analyst “Ukrainian Institute for the future” Yuri Romanenko said that we should not rejoice in the fall of oil prices.