The change in course should give a lifeline to American companies as they invest far less in exploration and production.
“Hopefully, the American oil industry has avoided a worst-case scenario,” said Amy Myers Jaffe, an energy and Middle East expert at the Council on Foreign Relations. “There still will be bankruptcies, but for the time being, the fears that there would be a wholesale destruction of the industry can now be put aside, because the worst of the price war has passed.”
It is possible oil prices will sink again in the coming days if traders are not satisfied with the new cuts. In fact, on Thursday, the last day that oil futures traded, the price fell sharply even though a deal was close.
“The agreement provides the expectation of stability,” Rene Ortiz, Ecuador’s energy minister and a former secretary general of OPEC, said in an interview on Sunday. “But whether the markets react accordingly is a different ballgame.”
With the pandemic crushing economies around the world, few buyers were available in recent weeks to buy the cheap Saudi crude. The kingdom stored some oil in Egypt and was forced to let unsold crude sit in tankers along its coasts.
The mounting glut became a threat to Saudi government finances. At a projected average price of $34 a barrel this year, Rystad Energy estimated the kingdom’s revenues would drop by 50 percent compared with 2019, a loss of $105 billion.
Saudi Arabia still has foreign reserves of $500 billion, but that has shrunk from $740 billion in 2013. Several years of depressed oil prices had already forced the kingdom to borrow money and reduce energy subsidies for citizens. Prince Mohammed is now counting on his reserves to help diversify the Saudi economy for the future.