Seminar Task 3

Group work

By: Anum Ikram

Ziroat Tosheva

Topic: Oil Market collapse due to COVID-19: Russia and Saudi Arabia Contract.

Introduction:
One of the most important case in this year because of the Covid-19 is Russia and Saudi
Arabia oil price economic war which was triggered in March 2020 by Saudi Arabia in response
to Russia's refusal to reduce oil production in order to keep prices for oil at moderate level. This
economic conflict resulted in a sheer drop of oil price over the spring of 2020.

The (COVID-19) pandemic has grown quickly in 2020. Measures taken to contain the virus have
influenced monetary activity, which thusly has suggestions for financial reporting. The
suggestions incorporate the estimation of assets and liabilities as well as disclosure and possibly
an entity’s capacity to proceed as a going concern. Apart from that it also effected entire
industries, their profits especially oil industry.

Oil Futures Went Negative:

There is no secret that from the beginning of the April in 2020, during Covid-19 lockdowns you
came across the new headings which written “Oil futures went negative”. The pandemic
outbreak causes many economic shocks and decreasing the price of securities. In lockdown, so
much oil was accessible, with so little interest for it from a worldwide economy. Coronavirus has
incited lockdowns, covered processing plants and prevented individuals from travelling. It causes
the huge reduction of oil demand also, as a result the price of oil turned negative. The pandemic
has additionally decreased worldwide interest for oil by around 29 million barrels per day from
around 100 million per year prior. In this time Russia and Saudi Arabiya flooded excess supply
to the world. In the United States the price of crude went to negative $37.631. Furthermore, the

1
Bloomberg 2020
COVID-19 has an impact on the portion of economic growth generated from domestic demand
and services, as opposed to imports and the price of oil in most developing economies that
present downside risks. To add this, it’s mentioned that the lower price of oil leads to higher
counterparty credit risk where counter-pаrties are reliant on oil prices for cash flow. Where a
company is part of a joint venture (JV), there could be an increased risk of JV partners being
unable to fund their share of liabilities – including decommissioning costs – and this could result
in other partners having to take on their share, putting increasing pressure on their own cash
reserves.

Moreover, it is known that oil price and stock price are highly correlated. It means this
consequences are effecting stock market as well. Also, if we correlated the situation with the
theories we can talk about option pricing models. Because negative prices have a serious impact
on risk management. Taking an example, the Black-Scholes model which is widely used to find
option pricing. The representation of the model is that the price of any asset is always greater
than zero. That’s true for the stock market, it’s not related about or not true for commodity
assets.

The Russia–Saudi Arabia oil price battle of 2020 was a monetary war set off in March 2020 by
Saudi Arabia because of Russia's refusal to diminish oil production as to save costs for oil. This
financial clash brought about a sheer drop of oil cost over the spring of 2020. Toward the
beginning of April 2020 and again in June 2020, Saudi Arabia and Russia consented to oil
production cuts. The cost got negative on 20 April. Obviously, Saudi Arabia's economy is less
broadened than the Russian economy, yet both offer a comparative distortion. Oil market
contains an extremely high portion in their GDPs. Both Russia and Saudi Arabia rely vigorously
upon their oil incomes to support their economies. Russia required a cost of US$60 a barrel to
adjust its government budget. It even needs a greater cost to adjust its present record, which
includes exports and imports of goods and services, plus net short-term capital transfers. Saudis
additionally required an a lot higher oil value, it required a US$80-per-barrel cost to adjust its
financial plan.

The impact of reducing the price of oil

What are the effects of oil price to these countries? Its note that oil revenue is a substantial
government income for several oil producing countries especially Russia and Saudi Arabia. The
reduction of oil price put pressure on state financials. Let’s analyze the impacts of this situation
for both countries.
Saudi Arabia announced a cut in capital expenditures from $35–40 billion planned to $25–30
billion. The government also increased its debt ceiling from 30 to 50 percent of GDP, due to both
oil prices and the impact of the pandemic, and planned to cut its spending by 5 percent as its
budget deficit was expected to increase from 6 to 9 percent.

In the case of Russia, the government had initially forecast that it would run a surplus of 930
billion roubles ($11.4 billion) in 2020, but following the outbreak of the price war stated that it
expected to run at a deficit. The ruble has dropped, having fallen over 30 percent between the
start of 2020 and 18 March.

Conclusion:

Be that as it may, in the end Saudi Arabia and Russia ended their oil-price battle with yield cut
arrangement. Saudi Arabia and Russia finished an overwhelming oil value battle in September.
Both of them agreed to cut yield along with different members from the OPEC+ union with an
end goal to lift the market from a pandemic-driven breakdown.

References:

https://www.bruegel.org/2020/04/covid-19-is-causing-the-collapse-of-oil-markets-when-will-
they-recover/

https://theconversation.com/oil-crash-explained-how-are-negative-oil-prices-even-possible-
136829

https://www.worldoil.com/news/2020/4/9/saudi-arabia-and-russia-end-their-oil-price-war-with-
output-cut-agreement

"Putin says oil supply cuts possible if all major producers take part". Financial Times. 3 April
2020. Retrieved 3 April 2020.

Sheppard, David; Raval, Anjli; Foy, Henry (18 March 2020). "Oil prices hit lowest level in 17
years as demand plunges". Financial Times. Retrieved 22 March 2020.