Oil markets crashed more than 30% after the disintegration of the OPEC+ alliance triggered an all-out price war between Saudi Arabia and Russia that is likely to have sweeping political and 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 Inc. warned prices could drop to near $20.
The cataclysmic collapse will resonate through the energy industry, from giants like Exxon Mobil Corp. to smaller shale drillers in West Texas. It 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 against renewable energy.
“It’s just a nightmare,” said Tamas Varga, an analyst at PVM Oil Associates Ltd. in London. “We have had a demand shock and now we have a supply shock as well. It’s unprecedented.”
Brent for May settlement tumbled as much as $14.25 a barrel to $31.02 on the London-based ICE Futures Europe Exchange, the biggest intraday loss since the U.S.-led bombing of Iraq in January 1991. It was trading down 21% at $35.76 as of 10:12 a.m. local time.
West Texas Intermediate crude for April slumped as much as 34% to $27.34a barrel in New York, subsequently paring losses to 23%.
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 over the weekend and signaled to buyers it would ramp up output — an unambiguous declaration of intent to flood the market with crude. Russia said its companies were free to pump as much as they could.
Aramco’s unprecedented pricing move came just hours after talks between the Organization of Petroleum Exporting Countries and its allies 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 producer has privately 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 a day, according to people familiar with the conversations, who asked not to be named to protect commercial relations.
Oil prices have suffered massive drops each time Saudi Arabia has launched a price war to drive competitors out of the market. WTI fell 66% from late 1985 to March 1986 when the country pumped at will amid a resurgence of U.S. oil output. Brent crude briefly dipped below $10 a barrel when the kingdom had a showdown with Venezuela in the late 1990s.
With oil demand already plummeting due to the economic impact of the coronavirus, traders forecast that prices will go even lower.
“The oil market is now faced with two highly uncertain bearish shocks with the clear outcome of a sharp price sell-off,” said Jeffrey Currie, head of commodities research at Goldman Sachs in New York.
While the price crash has been dramatic, for oil specialists the movements in time-spreads, options and volatility are just as remarkable. Brent’s three-month price structure widened sharply as oil for prompt delivery collapsed against later shipments. It moved deeper into contango, a sign of bearishness and oversupply, making it profitable for physical traders to buy crude and put it into storage, either in onshore tank farms or at sea on tankers.
Brent’s premium to WTI fell to its lowest level in more than two years as the coming gusher of crude from OPEC countries threatened to affect global supply-and-demand balances more directly than those within the U.S. The price differential fell to as narrow as $2.66 a barrel, from an average of more than $4 last week.