What you can learn from the 2020 “Negative Oil Price” scandal that has crashed economies

At the beginning of the new crown outbreak in 2020, Saudi Arabia and Russia fought an oil price war that led to a “negative price” spectacle in WTI crude oil futures, where oil was sold at a discount.

According to Bloomberg on April 7, Saudi state-run television launched a documentary series to restore the details of the price war.

In the documentary, the Saudi energy minister said the price war was not about specific prices or revenue issues, but about competing for policy “say” in OPEC+. After this battle, the Saudis have more confidence in themselves to lead the production policy of oil-producing countries.

Saudi Arabia has become increasingly reluctant to listen to U.S. production demands in recent years, instead putting its own interests at the forefront of production considerations, and the nearly 80-year-old U.S.-Saudi “oil-for-security” framework is failing.

Behind the negative oil price event: the battle for OPEC+ dominance

In the early days of the 2020 New Crown outbreak, the two leaders of OPEC+ were at an impasse when Saudi Arabia wanted to drastically reduce oil production in response to the decline in oil prices, but Russia said it wanted to “wait”. The Saudis then decided to fill up their production capacity by pouring sky-high amounts of crude oil into the global market, leading to a collapse in oil prices, which eventually led to OPEC+’s decision to cut production.

As a result of the Saudi decision, international oil prices fell nearly 30% on March 9, 2020, the largest one-day drop since the Gulf War. As the epidemic hit energy demand hard and storage facilities were unable to absorb it, WTI crude oil futures settled at a negative $37.63 on April 20, teaching crude oil futures investors a profound lesson in financial risk.

Recently, Saudi TV station MBC aired a documentary revealing details of the oil price war in the episode “OPEC Leadership”.

Saudi Crown Prince and Prime Minister Mohammed said Saudi Arabia should be at “maximum capacity” when OPEC+ could not agree on a production cut. The crown prince’s half-brother, Prince Abdulaziz, who was Saudi Arabia’s energy minister for just six months at the time, said in the documentary that “I was really scared” when he heard the order.

Prince Abdulaziz

Prince Abdulaziz warned the crown prince at the time that the decision would lead to a “dramatic and excessive drop” in international oil prices, and that national oil company Saudi Aramco might need to offer discounts to attract enough buyers. After hearing this, the crown prince still insisted on the decision to increase production at full throttle.

Prince Abdulaziz then told Saudi Aramco executives, “Then let’s do it, I received the order to act.” He recalled in the documentary how Mohammed Al Qahtani, who heads Saudi Aramco’s downstream operations, stood up straight away with tears in his eyes.

“It was tears of pride and joy,” Prince Abdulaziz said, “and he stood up and spoke, ‘This is the greatest day of my life.’ Then all of us stood up as well, and all of us applauded.”

Saudi Arabia’s extreme pressure paid off. in mid-April 2020, after several rounds of negotiations OPEC+ decided to jointly cut production by 9.7 million barrels per day, essentially equal to the 10 million barrel per day cut originally proposed by Saudi Arabia.

In the documentary, Prince Abdulaziz stated that the decision “is not about pricing, profits or revenues, but about ‘survival or destruction’; who is in charge of the industry?”.

“Saudi-first” policy shakes U.S.-Saudi “oil-for-security” alliance.

As a result of this, Saudi Arabia has gained full confidence in using its position as the world’s top oil exporter to shape OPEC+ policy.” We have gained an unprecedented victory and increased confidence from this,” Prince Abdulaziz said.

On April 2, 2023, Saudi Arabia once again took its leadership role, leading OPEC+ to shock global energy markets with an unexpected announcement of a production cut of more than 1 million barrels per day (bpd), including a 500,000 bpd cut by the Saudis themselves.

Both WTI and Brent crude oil futures prices rose by more than 8% and 6% respectively on a weekly basis, both back above $80/bbl. Analysts are predicting a possible return to $100/bbl, with some suggesting that global oil will fall into an oversupply situation sooner than previously expected.

The decision to cut production has created new tensions in the already strained U.S.-Saudi relationship. For its part, the White House has said that the OPEC+ production cut was “unwise”.

In fact, since 2022, the U.S. has repeatedly pressed Saudi Arabia to increase production in response to high inflation, but has been rebuffed. in July 2022, Biden visited the Middle East and failed to bring back a commitment to increase production. In October of the same year, before the U.S. midterm elections, OPEC+ announced a production cut of about 2 million barrels per day, with Biden saying that Saudi Arabia would face “consequences”, but this was not followed up.

For nearly 80 years, Saudi Arabia and the United States have formed a special “oil-for-security” alliance. In a nutshell, the Saudis maintain relatively stable oil prices and buy weapons from the United States, while the United States provides regional security and diplomatic support to the Saudis. Recently, there have been increasing signs that Saudi Arabia is putting its national interests at the forefront of its oil policy considerations.

“This decision to grow shows once again that the Saudi leadership has put its own economic interests very clearly at the forefront when it comes to setting oil production plans,” said Helima Croft, head of commodity strategy at RBC Capital Markets.

In 2016, the Saudi crown prince announced an ambitious “Vision 2030” plan to diversify the economy and society over 15 years, including developing tourism and building a global business and logistics hub. This transformation will require significant investment, and while the bulk of that investment is funded by Saudi Arabia’s sovereign wealth fund, which will not necessarily benefit directly from higher oil prices, local officials say the additional revenue from higher oil prices could accelerate local investment.

Bloomberg columnist Javier Blas, who attended the 2022 “Davos in the Desert” (Saudi Arabia’s “Future Investment Initiative” conference), observed that after several years in the making, Saudi Arabia has developed a “Saudi First” policy on energy, economics and diplomacy. A determined and ambitious Saudi Arabia remains an ally of the United States, but is gradually moving away from the old “oil-for-security” framework.

Prince Abdulaziz told the forum at the time that Wall Streeters always asked him, “Are you with us or against us?” , but the Saudis are not choosing sides, “Can’t there be room for a statement like ‘We are for Saudi Arabia and the Saudi people’?”

Javier Blas argues that in the past the Saudis have always accepted lower oil prices, increased production, or delayed production cuts for the benefit of Washington, but things have changed. When the global economic outlook faces uncertainty, the Saudis would rather make the mistake of supplying too little rather than too much, so that they can at least maintain high oil prices.