The outbreak of the novel virus has caused a slowdown in economic growth and a fall in oil demand.
Crude prices had already plummeted ahead of the Vienna meeting where Saudi Arabia demanded that the OPEC+ countries dramatically cut their oil output by up to 3.6 million barrels through 2020.
Previously, Russia and Saudi Arabia agreed to slash crude production by 2.1 million barrels per day within the OPEC+ format that was established in 2016 to stabilise fluctuating oil markets. As Russian Energy minister Alexander Novak rejected a Saudi ultimatum the talks collapsed leaving OPEC+ free to increase output.
The next day Riyadh introduced significant oil discounts for its Asian, European and American customers and vowed to ramp up production to above 10 million barrels per day next month, triggering price frictions within OPEC+ member states.
'Saudi Pricing Strategy Threw Markets in Disarray'
Riyadh "has punitively deployed its comparative advantage against other oil-producing countries" pursuing two objectives, says Justin Dargin, an energy analyst at the University of Oxford.
First, Saudi Arabia's oil strategy is meant "to bring the other oil producers to the table and enforce an accord"; second, it demonstrates to the world that the slump in crude prices would be economically disastrous for all, he suggests.
Indeed, "Saudi Arabia’s decision to pursue a market share strategy by raising output and offering deep price discounts on its crude in April… has [already] thrown markets in complete disarray", echoes Oliver Klaus, Dubai bureau chief at Energy Intelligence.
What's make the situation even worse "is that it comes against a backdrop of sharply falling oil demand, especially in key consuming countries such as China and elsewhere in Asia" amid the coronavirus epidemic, he notes.
'Oil Prices Below $40 Will Hit Saudi Economy'
Klaus believes that the slide in oil prices is going to hit Saudi Arabia as Riyadh's budget is "based on a breakeven oil price of roughly $85". He foresees that crude prices are likely to stay below $40 for some time with demand being hammered by the coronavirus outbreak.
Dr Mamdouh G Salameh, an international oil economist and visiting professor of energy economics at ESCP Europe Business School, London, agrees that Saudi Arabia's pricing strategy may backfire.
"If Saudi Arabia is considering flooding the global market in the aftermath of OPEC+ failure to agree deeper production cuts, it will end up in a similar fiasco to the one in 2014 when it decided in the aftermath of the oil price collapse to flood the global oil market and was forced to reverse its discredited policy having inflicted severe damage on its economy", Salameh says, adding the Saudi economy cannot live too long with an oil price of $30-$40 a barrel.
The economist doubts Riyadh's ability to raise its oil production by 2 million barrels a day (mbd) to 12.0 mbd: "Its claim of having a production capacity of 12.0 mbd has never been tested", the professor says. "Moreover, Saudi oil production is in decline having peaked at 9.65 mbd in 2005".
According to the professor, the largest loser of the oil price collapse is the global economy. However, within the global economy, the US shale oil industry and Saudi Arabia are likely to be hurt the most, he observes.
'Russia's Decision to Refuse Further Cuts is Logical'
Salameh rules out that it was Moscow that provoked the OPEC+ agreement's collapse. He explained that Russia's decision to refuse any deepening cuts was "logical" since any further cuts in oil production would have proven futile to counter-weight the economic slowdown and would have resulted in further loss of OPEC’s market share.
Sukrit Vijayakar, founder and director of energy consulting company Trifecta Consultants, shares Salameh's stance stressing that "Russia's decision to discontinue the artificial price support the OPEC+ group has provided to the market is rational".
"The progressive cuts since January 2017 have only provided weaker producers the ability to benefit from the action of the stronger producers without them having to do anything in return for such benefits", he explains. "While Saudi Arabia, because of its lower production costs could still sell oil profitably, it became increasingly difficult for other producers to cut down production streams and still make sufficient profits to meet their financial needs".
Saudi Aramco has the lowest production cost in the world at around $2.80 per barrel.
That said, Brent is likely to fluctuate between $30 and $40 per barrel in the near future, Vijayakar highlights that "such low prices cannot be supportive to the global economy since both producers and consumers should be getting a fair price for the world at large to benefit and prosper".
'Saudi-Russian Cooperation Should Continue'
The analysts suggest that the only way to fix crude prices and stabilise a global economy already affected by coronavirus is to hold a dialogue within the framework of the OPEC+ format.
"The absence of a viable agreement between OPEC+ members will only intensify the already heavy burden on the global economy as it struggles to manage the uncertainties of the global pandemic", warns Justin Dargin.
"Saudi-Russian cooperation has served OPEC well in the past", echoes Dr Mamdouh G Salameh. "That is why the organisation should maintain this cooperation".