Oil price plunges over 30% as Saudi Arabia unveils aggressive price cuts

US crude and Brent crude crashed as much as 27% and 31% respectively in early trading on Monday 09 March.

Oil prices plummeted over 30% on Sunday – the largest one-day drop since 1991 – after the alliance between OPEC+ and Russia came undone last Friday 06 March over supply disagreements.

On Monday 09 March, US Crude oil prices fell as much as 27% within minutes of the market opening to a four-year low of US$30 a barrel.

Brent Crude also dropped 31% in early trading from US$45 a barrel to US$31.02 a barrel.

Saudi Arabia to raise oil output and slash prices

Traders are selling off, in anticipation of higher oil output and lower prices, triggered by Saudi Arabia’s shock decision to raise oil production by two million barrels a day, and slash prices by between US$6 to US$8 per barrel.

Saudi oil production could reportedly reach upward of 10 million barrels per day starting from April, to as much as 12 million barrels.

Saudi Arabia – the de facto leader of the Organization of Petroleum Exporting Countries (OPEC) – revealed its plans on Sunday 08 March, as a response to Russia’s refusal to reduce its output in Friday’s Vienna meeting amid the worsening coronavirus outbreak, which has hit oil demand hard in recent weeks.

Russian President Vladimir Putin had earlier indicated that the country's current oil prices are ‘acceptable’, and that it had the tools to respond to any adverse market impact from the coronavirus’ spread.

Following Friday’s meeting, oil prices had plunged as much as 10%. Oil prices had already been bearish in the last one month due to lower demand caused by the coronavirus. US crude price has fallen roughly 44% since February, while Brent is down some 43.1%.

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Analysts: oil price collapse has only ‘just begun’

Analysts view the move by Saudi Arabia as a ‘market share grab’ and the start of a ‘price war’.

‘The signal is Saudi Arabia is looking to open the spigots and fight for market share,’ said Matt Smith, director of commodity research at ClipperData, told CNN. ‘Saudi is rolling up its sleeves for a price war.’

Bob McNally at Rapidan Energy Group said that it is ‘very rare’ for a collapse in demand to ‘coincide with a supply surge’, telling The Financial Times that it is the most price-bearish crude combination since the early 1930s. He believes the price collapse has only ‘just begun’.

According to RBC Capital Markets’ Biraj Borkhataria, this latest price war will have a ripple effect on the rest of the energy industry. He said the ‘massive’ drop in oil prices ‘clearly exposes all of the energy majors’, as they ‘need Brent crude at US$50-US$60 a barrel to cover their dividends’.

US shale oil producers, who have traditionally relied on higher prices to profit due to their higher costs of production, will also be hurt by the tensions between Russia and Saudi Arabia.

‘Russia has been dropping hints that the real target is the US shale oil producers, because it is fed up with cutting output and just leaving them with space,’ FGE consultants wrote in a note to clients on Sunday.

‘Such an attack may be doomed to failure unless prices remain low for a long time,’ they added.

Brent crude could fall to as low as US$20 a barrel

Following Saudi Arabia’s latest announcement, Goldman Sachs’ commodity research team lowered its price forecast for Brent crude to US$30 a barrel for the second and third quarters on 2020, further cautioning that there could be more declines to as low as US$20 a barrel in the coming weeks.

Some market watchers opined that this latest oil war is one that would be difficult to recover from.

‘It is hard to see how the relationship can easily be put back on a solid footing,’ said RBC Capital Markets analysts, while FGE consultants referred to it as a ‘collective suicide with a lose-lose conclusion’.

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