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09 March 2020
INVESTMENT

Oil drops 31 per cent as price war erupts amid coronavirus concerns

The prospect of another price war is spooking traders who will remember the crash that began in 2014 when an explosion in US shale production prompted Organisation of Petroleum Exporting Countries to open the spigots in an attempt to suppress prices

With oil demand already plummeting due to the economic impact of the coronavirus, traders forecast that prices will go even lower/Bloomberg

by Bloomberg

Oil markets have crushed more than 30 per cent after the disintegration of the Organisation of Petroleum Exporting Countries and its allies (OPEC+) alliance triggered an all-out price war between Saudi Arabia and Russia that is likely to have economic consequences.

Brent futures suffered the second-largest decline on record in the opening seconds of trading in Asia, behind only the plunge during the Gulf War in 1991. As the global oil benchmark plummeted to as low as $31.02 a barrel, Goldman Sachs Group warned prices could drop to near a $20 barrel.

The catastrophic collapse will resonate through the energy industry, from giants like Exxon Mobil to smaller shale drillers in West Texas. The collapse will hit the budgets of oil-dependent nations from Iraq to Nigeria and could also reshape global politics, eroding the influence of countries like Saudi Arabia.

The fight against climate change may suffer a setback as fossil fuels become more competitive versus renewable energy.

Hammered by withering demand due to the coronavirus, the oil market is sinking deeper into chaos on the prospect of a supply free-for-all. Saudi Arabia slashed its official prices by the most in at least 20 years and signalled to buyers it would ramp up output—an unambiguous declaration of intent to flood the market with crude.

Similarly, Russia said that its companies were free to pump as much as they could.

Saudi Aramco’s unprecedented pricing move came just hours after the talks between OPEC+ ended in dramatic failure. The breakup of the alliance effectively ends the cooperation between Saudi Arabia and Russia that has underpinned oil prices since 2016.

The state-owned Saudi oil producer told some market participants it plans to raise output well above 10 million barrels a day next month and could even reach a record 12 million barrels a day.

Oil prices have suffered massive drops each time that Saudi Arabia has launched a price war to drive competitors out of the market. West Texas Intermediate fell 66 per cent from late 1985 to March 1986 when the country pumped at will amid a resurgence of US oil output.

With oil demand already plummeting due to the economic impact of the coronavirus, traders forecast that prices will go even lower.


RELATED STORIES: Oil OPEC+ Saudi Arabia Russia US Shale Saudi Aramco coronavirus

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