Oil Price Crash Heaviest Since 1991 As Saudi Arabia Takes On Russia
Oil prices opened this morning to historic losses, the extent of which were last seen almost 30 years ago. A breakdown in talks between OPEC and Russia, who have worked together in recent years to coordinate global supply cuts and increases, saw U.S. oil prices crash by a staggering 34% overnight to a four-year low of $27.34 a barrel.
The slump is the result of Saudi Arabia, the de facto leader of OPEC, the international alliance of major oil producers, launching a price war on recent ally Russia. The disintegration of relations between the two energy powerhouses is expected to see Saudi Arabia flood the market with cheap crude as it moves to recapture market share.
Both Brent crude, the global benchmark, and WTI crude, the U.S. benchmark, look set to record their worst day since 1991.
Source: Business Insider
Other financial markets have been panicked by the shock move. By midday in London, the FTSE 100 was down by over 7%, following on from plunging Asian markets. U.S. futures suggest Wall Street will open to a spectacular loss. Germany’s DAX 30 was also down over 7%, while oil stocks have been devastated. BP was down almost 20% at lunch time and Shell just under 14%.
Tensions between Russia and Saudi Arabia came to a head after Russia pushed back against an OPEC proposal for further production cuts to help prop up prices suffering from the heavy impact the coronavirus emergency has had. A failure to reach agreement saw oil prices crash by 10% on Friday. However, the situation then escalated over the course of the weekend when Saudi Arabia slashed its prices to win back market share from Russia in retribution for it not playing along with the Middle Eastern kingdom’s preference.
Quoted by CNBC, ClipperData’s director of commodity research, stated:
"The signal is Saudi Arabia is looking to open the spigots and fight for market share. Saudi is rolling up its sleeves for a price war."
The consequences of Saudi Arabia’s move will not only be felt by Russia. U.S. shale oil producers, which have relatively high overheads, will struggle to survive it prices remain depressed for any length of time. Some analysts speculate that Russia may even be prepared to take the hit in the short term if it takes shale producers out. The country’s oil industry has reportedly felt for some time that the U.S. industry is the main beneficiary of the production cuts maintained by OPEC and allies over the past couple of years.
The 2014-16 slump in oil prices put numerous shale gas companies out of business but the U.S. sector emerged stronger, with those surviving having implemented efficiencies and cut costs. The result was the USA becoming the world’s largest oil producer – a position which must now be in peril. Helima Croft, head of global commodity strategy for RBC Capital Markets, briefed clients in a Friday note with:
"The perils of playing a game of brinksmanship with Vladimir Putin were proven in dramatic fashion. It is hard to see how the relationship can easily be put back on a solid footing."
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