Oil prices hit four year low at $30 per barrel, Saudi’s okay with it

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West Texas Intermediate crude

The global financial markets have been hit hard with a number of adverse developments over the past couple of weeks. In addition to the ongoing coronavirus pandemic, which shows no signs of slowing down and will likely continue to worsen, there’s also the oil price war going on between Saudi Arabia and Russia. Between everything, prices for oil have plummeted to new multi-year lows.

The price for American standard West Texas Intermediate crude is trading near the $30 per barrel price point, event dropping below $30 at one point during Monday, something not seen in over four years. Despite best efforts from the Federal Reserve to cut interest rates, investor panic continued as the Dow Jones plummeted an astonishing 3,000 points over the course of a single day. Prices for international benchmark Brent crude ended Monday at $33.56 per barrel, still extraordinarily low.

“Clearly the oil market has ignored the emergency rate cut from the U.S. Fed over the weekend. The breakdown in the OPEC+ deal could not have come at a worse time, with the market already having to deal with a demand shock,” said head commodity analyst and strategist at ING. “The surge in supply expected from April, along with the demand hit, does mean that the global oil market is set to see a significant surplus over 2Q20, suggesting that this current weakness is likely to persist through 2Q20.”

While the coronavirus has been the primary cause of the market instability over the past month or so, oil markets were hit by another major development when Saudi Arabia suddenly decided to drastically increase its oil production in order to start a price war with Russia. The kingdom had hoped that the Kremlin would go along with further supply cuts, but when it seemed like that wouldn’t be the case, Saudi Arabia decided to do the opposite, start a price war that would hurt both countries until an agreement was made.

The kingdom has mentioned that it’s comfortable with keeping oil prices around $30 per barrel, something that would have been unthinkable a year ago. Regardless, the real question on many oil experts’ minds is just how much money the kingdom will burn through to undergo this price war with Russia and whether it’s completely worth it in the end.

Making matters worse for oil prices are the bleak industrial numbers out of China. The country used to be one of the largest consumers of oil, but the quarantines across the country have done a lot to hamper production. Industrial production fell by around 13.5%, while retail sales have fallen by around 20% thanks to the coronavirus.

Back on Thursday, oil prices had plunged to the lowest point seen since 11 years, with gas futures contracts having seen a 35% decline over the course of the week. In the long-run, prices aren’t expected to improve at all, at least until the Saudi-Russian oil price war ends up resolving itself somehow. The coronavirus isn’t expected to go away either, but its quite possible that the current panic will fade away as people become acclimatized to their new reality.

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