On Monday, oil prices fell by nearly 30% after Saudi Arabia slashed oil prices and set plans for a significant increase in crude production from April. Following the Saudi move, oil prices fell by as much as a third after Russia balked at cutting production as proposed by OPEC in order to stabilize oil markets that have been hit by the China’s coronavirus pandemic.
By 0433 GMT, Brent crude futures were down by 29% to $31.98 a barrel. Earlier it had dropped to $31.02 – its lowest level since February 12, 2016. Brent crude futures are on track for their biggest daily fall since January 17, 1991 – the start of the first Gulf War.
U.S. West Texas Intermediate (WTI) crude also fell by 32% to $27.99 a barrel, after touching $27.34 – its lowest since February 22, 2016. WTI is also potentially headed for its biggest decline on record, and could even drop below its January 1991 levels.
“I think all forecasts are out the window,” said Jonathan Barratt, chief investment officer at Probis Securities in Sydney. “It seems like a race to the bottom to secure order(s).”
The disintegration of OPEC+ comes after three years of cooperation by its members to support the global oil market.
From April Saudi Arabia plans on boosting its crude oil output above 10 million barrels per day (bpd) once the current deal to curb production expires at the end of March, said two sources.
Saudi Arabia, the world’s biggest crde oil producer, aims to punish Russia, the world’s second-largest producer, for not supporting the production cuts proposed last week by the Organization of the Petroleum Exporting Countries (OPEC).
This battle for market share was last seen in the 2014 to 2016 period wherein Saudi Arabia, Russia and other major oil producers fought to boost production from the United States. The United States has grown to become the world’s biggest oil producer, with oil outputs fro shale oil fields doubling its oil production output over the last decade.
“This clearly is the start of a price war, and the Saudis were quick to react over the weekend, reducing their April official selling price for crude oil significantly,” said ING Economics said in a note.
Over the weekend, Saudi Arabia has official cut its selling prices of crude oil for April for all destinations by $6 to $8 a barrel.
IMPACT FROM CHINA’S CORONAVIRUS
The coronavirus which has mysteriously emerged from China’s Wuhan district and which has now spread across many countries around the globe, has significantly affected China’s economy. Beijing has also slashed oil import following the outbreak.
The spread of the coronavirus to other economies, including Japan, Italy, South Korea, India, France, and the United States have increased concerns in the industry that it could lead to a further slump in the demand for oil.
As a result, major banks, including Goldman Sachs and Morgan Stanley have cut their demand growth forecasts for crude, with Morgan Stanley even predicting China to have a zero demand growth in 2020.
Goldman sees a contraction of 150,000 bpd in global demand.