Prices for oil have suffered significantly so far in 2020, with most OPEC countries have implemented a number of significant supply cuts in an effort to help prop up prices. While Saudi Arabia hoped that it would convince some of its other OPEC allies, most notably Russia, to continue with further supply cuts, it ended up failing to convince the Kremlin that doing so would be best for both countries. In retaliation, it appears that the Saudi Arabian kingdom has now started a price war against Russia, flooding the market with oil at a cheaper price. International markets took a nose dive in response to the news, with oil prices falling as much as 30% following the announcement.
It was a dramatic announcement that shook the markets and will likely be the dominant story throughout Monday’s trading session. Prices for U.S. West Texas Intermediate fell by 34% to $27.3 per barrel, a four-year low, while international benchmark Brent crude fell by 26% to $33.5 per barrel. Oil contracts are set to see their single worst trading day since 1991.
OPEC had arranged a meeting with its allies last week in Vienna, hoping to convince other nations to further cut oil production in an effort to stop prices from falling further. Worries about the spreading coronavirus outbreak have done significant damage to oil prices, especially following the additional outbreaks in non-Asian countries, like Italy and Iran.
However, with Russia choosing not to go along with Saudi Arabia’s original plans, the kingdom has decided to pursue a price war with the Kremlin, hoping that Putin and his leadership will change their minds in face of plummeting prices. The question many will be asking now is just how long Saudi Arabia plans to maintain this price war, as it’s something that would hurt itself as well as other oil-producing nations.
The last time a major oil and gas crash occurred was during 2014-2016, where many companies in the sector ended up going bankrupt as prices were too low to sustain operations. While the U.S. energy sector, specifically its shale industry, has emerged stronger following that period, this move still poses a significant danger to the U.S. economy as well.
“The perils of playing a game of brinksmanship with Vladimir Putin were proven in dramatic fashion,” wrote Helima Croft, head of global commodity strategy at RBC Capital Markets, in a note to clients. “It is hard to see how the relationship can easily be put back on a solid footing.”
As expected, major energy companies have already begun the day with significant declines in the markets. Giants such as BP and Royal Dutch Shell are down around 18% and 21% respectively in early trading on Monday morning, with both companies likely to continue to fall as the markets officially open.
Whether or not this move will be enough to pressure other oil-producing nations to come to the table is yet to be seen. However, it’s definitely not what investors were hoping to see as the markets continue to suffer from the coronavirus outbreak. So far, the first quarter of 2020 has been off to a turbulent start.