Oil prices crashed as much as 30 per cent within seconds of the market opening on Sunday evening after Saudi Arabia launched an aggressive price war over the weekend, driving crude to its lowest level in four years.
The sell-off followed the collapse of Saudi Arabia’s oil-cutting alliance on Friday, with Russia refusing to make deeper cuts to output despite the sharp hit to demand from the coronavirus outbreak. Saudi Arabia’s response — to raise output and offer its crude at unprecedented price discounts — came despite a weakening economy and the threat of coronavirus becoming a global pandemic sapping demand for transport and fuel.
“It is very rare for a demand collapse to coincide with a supply surge,” said Bob McNally at the Rapidan energy Group. “It is the most crude price-bearish combination since the early 1930s. The price collapse has just begun.”
Brent crude, the international benchmark, dropped from $45 a barrel to $31.02 a barrel in one of the biggest one-day drops in its history, with traders spooked by Saudi Arabia’s decision to launch an effective price war just days after trying to secure a deal with Opec and Russia to reduce production.
US benchmark West Texas Intermediate fell to a low of $30 a barrel.
The sharp drop for oil sent shockwaves through global financial markets. US stock futures tumbled in Asian trading, with the S&P 500 expected to drop 5 per cent when Wall Street opens later on Monday and the FTSE 100 tipped to fall 3.7 per cent.
Asia-Pacific equities fell sharply, with Sydney’s S&P/ASX 200 down 5.4 per cent and on track for its worst one-day fall since the global financial crisis. In Tokyo the Topix fell 4.2 per cent.
Investors piled into haven assets, driving the 10-year US Treasury yield down more than a quarter of a percentage point to 0.4949 per cent, a record low. Yields fall as bond prices rise. Gold jumped 1.3 per cent to $1,694.42 per ounce.
Number of barrels per day Saudi Arabia plans to start pumping next month
The US dollar lost ground against its international peers, with the dollar index dropping 0.5 per cent.The Japanese yen strengthened as much as 1.8 per cent against the dollar to ¥103.53, pushing past the ¥104 mark for the first time in more than three years. The euro gained as much as 1 per cent to $1.1394, an eight-month high.
But the currencies of oil-producing countries were hammered. The Canadian dollar dropped 1.3 per cent against the greenback while Norway’s krone fell as much as 4.7 per cent to its lowest level against the dollar since 1985, according to Reuters data.
Saudi Arabia, Opec’s de facto leader, is now seen as trying to take on and even punish Russia in a fight for market share, including targeting customers in Russia’s traditional backyard in Europe. A price war will also squeeze other high-cost producers, including hitting the US shale sector, the growth of which over the past decade first brought Moscow and Riyadh together.
The tactic is reminiscent of Saudi Arabia’s attempt to win back market share in 2014 during the last price war, but this time it comes as demand is seen falling due to the impact of the coronavirus, which has crimped air travel and the wider economy.
Russia declined to cut output last week with one eye on squeezing US shale, which has struggled to turn a profit despite turbocharged growth, with Moscow angry over Washington’s attempts to target Russian energy companies with sanctions. But the aggressive response of Saudi Arabia now risks a severe hit to the Kremlin’s budget.
Saudi Arabia plans to pump more than 10m barrels a day next month while announcing unprecedented discounts of almost 20 per cent in key markets. Production could eventually surpass 11m b/d, one person close to Saudi oil policy said — well above the roughly 9m b/d Riyadh had previously proposed lowering its output to.
The resultant price fall spells trouble for the entire oil industry, which has only slowly recovered from the last price crash between 2014-16, from publicly owned producers in the North Sea, oil majors like Royal Dutch Shell and ExxonMobil, and the oil-dependent states in the Middle East.
Biraj Borkhataria at RBC Capital Markets said the “massive” drop in oil prices “clearly exposes all of the energy majors”.
“[They] need Brent crude at $50-$60 a barrel to cover their dividends,” Mr Borkhataria added.
While lower prices may provide a mild economic boost for large oil importers that is likely to be largely overshadowed by the impact of the coronavirus, while weaker commodity-dependent countries could find themselves facing huge budget gaps.
Goldman Sachs, one of the most influential banks in commodity markets, on Sunday lowered its price forecast for Brent to $30 a barrel for the second and third quarters, and warned there could be dips to $20 a barrel in the coming weeks.
Prices recovered slightly as trading continued, with Brent rising back to near $36 a barrel, but still down more than 20 per cent on the day.
Some see Saudi Arabia’s move as an attempt to force Russia back to the negotiating table to see if it will now agree to make deeper cuts to production, reigniting the oil-based alliance that has helped support the market since 2016.
But relations between Moscow and Riyadh are now under real strain, and analysts do not see an easy road back to co-operation for the two countries.
“This is a collective suicide with a lose-lose conclusion,” said analysts at FGE, an energy consultancy.