News of a potential increase in Saudi Arabia’s crude production with COVID 19 anxiety sent oil prices to 18-year lows as markets opened on Monday. Oil prices plummeted by more 20% during the day, seeing their worst drop since the Gulf War in 1991.
In our podcast today, we host Gaurav Kashyap and Mark Lee from Equiti Securities in Dubai and London respectively. We focus on Oil and some of the reasons behind the recent sharp decline.
COVID 19 has worsened the situation due to limited travel and restricted manufacturing thus shrinking global demand for oil. As a result, oil producers are in a race to the bottom in a global price war.
Saudi’s Aramco will increase its sustainable oil production by 1 million BPD (barrels per day) from 12 million BPD to 13 million BPD from a directive from the ministry of energy.
However, Mark Lee feels that Saudi’s hiked production coupled with low prices is unsustainable in the long run and is likely to hurt Saudi Arabia’s economy. Historically, such moves have proven to be counter-productive to Saudi such as in 2014. The petroleum sector accounts for roughly 87% of budget revenues, 42% of GDP, and 90% of export earnings.
Moscow said Russian oil companies might boost output by up to 300,000 bpd and could increase it by as much as 500,000 BPD. Russia has more diversified revenue streams, massive oil reserves thus can absorb economic damage brought by declining prices. Russia relies on oil revenue for only 37% of its budget.
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