Saudi Arabia ‘unlikely winner’ of 2020 oil crash: report

Saudi Arabia is the unlikely winner of the 2020 oil crash as a result of oil price slumps, the steep decline in demand amid the outbreak of the COVID-19 pandemic, as the Kingdom will get out of the crisis with more strength on the economic and geopolitical levels, the Foreign Policy magazine said.
 

The magazine cited various reasons for this opinion as follows:  
 

Saudi Arabia has not only plump fiscal reserves but also the demonstrated capacity to borrow.

The Kingdom could borrow as much as $58 billion in 2020. It would draw down up to $32 billion from its fiscal reserves. With $474 billion held by the central bank in foreign exchange reserves, Saudi Arabia remains comfortably above the level of around $300 billion, which many consider the minimum to defend its currency, the riyal, which is pegged to the dollar.
 

The Kingdom will end up with higher oil revenues and a bigger share of the oil market once the market stabilizes. According to the U.S. Energy Information Administration, though the outlook for future oil demand is highly uncertain, demand is likely to grow faster than supply.

It also expects the world oil demand to return to its pre-pandemic levels by the end of 2020.
 

The International Energy Agency (IEA) is almost as optimistic, expecting demand to be only 2 to 3% below its 2019 average of 100 million barrels per day by the end of the year. If measures to contain the pathogen last longer than expected or there is a second wave of the virus, the recovery will take longer, but most scenarios still expect demand to eventually recover.
 

Oil demand could actually get a boost if more people decide private cars make them feel safer than crowded mass transit.
 

On the contrary, oil supply will take longer to return as shut-in production is lost, investment in new supply is scrapped, and the U.S. shale revolution slows.
 

With the oil glut pushing global oil storage to the limits—land-based storage will be full as soon as this month—an unprecedented number of producing oil wells will need to be shut off.
 

Accordingly, some of that supply will never come back, and some will take substantial time and investment to bring back online. Energy Aspects, an oil consultancy, projects 4 million barrels per day of supply could be at risk of semi-permanent damage.
 

Even without any growth in oil demand, around 6 million barrels per day of new oil supply must be brought online every year just to offset natural production declines.
 

Moreover, oil is already out of favor with investors concerned with the industry’s poor returns and rising political and social pressures.
 

On the other hand, US shale oil, in particular, will take years to return to its pre-coronavirus levels.
 

Depending on how long oil demand remains depressed, US oil production is projected to drop 30% from its pre-coronavirus peak of around 13 million barrels per day.
 

In fact, as COVID-19 sets the stage for tighter oil markets and higher prices, Saudi Arabia, along with a few other Gulf states and Russia, will not only benefit from higher prices but actually find opportunities to grow market share and sell more oil.
 

Saudi Arabia has strengthened its geopolitical position by shoring up its fraying alliance with the United States and re-establishing itself as the global oil market’s swing producer.
 

For all the talk of oil production quotas in Texas or creating a new global oil cartel through the G-20, calling Riyadh was the only real option available to policymakers at the end of the day—as it has long been. That is because Saudi Arabia has long been the only country willing to hold, at significant cost, a meaningful amount of spare production capacity that allows it to add or subtract supply to or from the market quickly. This singular position—which it just made plain once again to the world—gives the kingdom not only power over the global oil market but also significant geopolitical influence.
 

Moreover, Moscow is more dependent on Riyadh in managing the oil market than vice versa, strengthening Saudi Arabia’s hand in their relationship.
 

Additionally, Saudi Arabia has improved its standing in Washington. Saudi Arabia may also have undermined US lawmakers’ plans for anti-OPEC legislation.
 

It is difficult to argue OPEC is a harmful cartel. US vitriol will flare up again in the coming weeks, when a flotilla of Saudi tankers sent off during the price war two months ago will dump triple the normal level of deliveries onto an already saturated US market. But this only means that U.S. politicians will once again have to beseech Riyadh to extend or deepen supply cuts at the next OPEC+ meeting in June.