Crude oil prices underwent a historic drop after Saudi Arabia shocked the market by launching a price war against onetime ally Russia.
In a rare historical event, futures markets were locked limit down in overnight trading on Sunday, as investors panicked over the coronavirus and oil crashed.
On Saturday, Saudi Arabia cut official crude selling prices for April, radically reversing its stance from previous attempts to support the oil market as the coronavirus destroys global demand. The decision for the cut arose after OPEC talks deteriorated on Friday, encouraging confident strategists to predict oil prices tanking to $20 per barrel this year. Unfortunately, they were not far off, as crude hit just over $27 a barrel in overnight trading, and is currently trading near $33.50, down 19%.
“Crude has become a bigger problem for markets than the coronavirus,” Adam Crisafulli, founder of Vital Knowledge, said Sunday. “It will be virtually impossible for the [S&P 500] to sustainably bounce if Brent continues to crater,” he added.
The sell-off in crude started last week when OPEC was unable to strike a deal with its allies, led by Russia, about oil production cuts. That then caused Saudi Arabia to cut its oil prices as it supposedly looks to increase production.
“It’s looking pretty ugly as we speak because the coronavirus has eroded away demand buy some for million barrels in the first quarter in China alone. That’s pretty radical and not something that can be repaired in the next two or three months it looks like. In fact, the international energy agency was suggesting a contraction for the first time since 2009 in oil demand by about a million barrels a day, if not a little more. Then we had an oversupply already hitting the market before the virus, and now we have a clash of titans with number one and number Number two oil exporters, Saudi Arabia and Russia disagreeing on how we remedy the situation,” said John Defterios, CNN Business Emerging Markets Editor.
While oil markets have been in decline for some time, the plunge to multi-year lows on Monday are generating fears from analysts and investors that an all-out price war is imminent.
“This has turned into a scorched Earth approach by Saudi Arabia, in particular, to deal with the problem of chronic overproduction,” Again Capital’s John Kilduff said. “The Saudis are the lowest cost producer by far. There is a reckoning ahead for all other producers, especially those companies operating in the U.S shale patch.”
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