Crude futures tumbled on Monday amid a spectacular free-fall triggered by Saudi Arabia's decision to open the floodgates and pump at will, following the collapse of an alliance between Opec and non-member producers led by Russia.
The last time Saudi Arabia and other Opec producers pumped at will in the face of rising supplies from US shale producers was in late 2014. That policy did not produce the goal of killing off the shale industry. In a policy reversal, the Saudis resorted to output curbs in co-ordination with other producers.
Global benchmark Brent futures initially crashed by 31% in early Asia trade to $31 per barrel after Saudi Arabia, angered by Russia’s refusal to back fresh supply curbs, fired the first shot in a price war by offering deep discounts to clients.
Brent later recovered to fetch around $36.60 per barrel, still a fall of nearly 19%.
US West Texas Intermediate crude initially fell by over 27.4%, to $30 a barrel in the biggest percentage drop since the first Gulf War in January 1991. The US oil futures later recovered to around $34.21, down 17% from its Friday close.
The plunging oil price also dragged down supermajors' share prices on Monday on the London Stock Exchange. BP shares closed 19% lower on Monday, while supermajor Shell were down 18% at the close of trading.
Redburn analysts wrote in a note on Monday that they believe the principal damage from the Opec price war will be to debt-ridden exploration and production companies, such as London-listed Premier Oil and Tullow Oil.
Premier's shares in London closed more than 57% lower on Monday, while Tullow’s shares ended the day by losing 31% of their value.
Trading on Wall Street stock futures was halted for 15 minutes Monday after the S&P 500 and Dow Jones Industrial Average stock indices both fell 7% at the open, triggering a pause intended to stop rapid declines, according to the Wall Street Journal.
The unprecedented crash came after Opec linchpin Saudi Arabia pledged to unleash its enormous excess capacity onto an already glutted market. The Saudis are capable of quickly boosting their production by 2 million barrels per day at short notice.
Their loyal allies in the Persian Gulf — the United Arab Emirates and Kuwait — can easily offload an extra 1 million bpd.
In addition, Libya can quickly resume production of 1 million bpd in the event of a breakthrough in peace talks between the government and rebels in the oil-rich region of the North African country.
The drop hurt the share price of Saudi state giant Saudi Aramco, which saw its shares fall 10% early on Monday against Sunday's close. Shares were trading at 28.35 riyals ($7.56) after 1pm GMT on Monday, well below the 32 riyals per share at which the company launched its initial public offering late last year.
The Saudi move, designed to punish Russia for refusing to join in new output curbs to prop up a faltering oil market in the wake of the coronavirus outbreak, threatens to cause deep social and economic problems in producing countries and sink many small and medium-sized oil companies struggling with debt, low prices and falling demand.
Oil prices began falling sharply on Friday after the collapse of the Opec+ alliance, which brought Opec and other producers including Russia together to defend oil revenues by keeping a tight lid on production.
Saudi Arabia is planning to hike its crude output above 10 million bpd in April after the current deal on production curbs expires at the end of March.
Saudi Arabia, the world’s largest crude exporter, succeeded last week in persuading fellow Opec members to back fresh cuts of 1.5 million bpd to keep a floor under the market.
Non-members were expected to shoulder 500,000 bpd of the overall cuts. The doomed deal would have thus resulted in combined production cuts of 3.6 million bpd, which the Saudis believed would be enough to soften the devastating fallout from the coronavirus spread.
At the meetings at Opec’s headquarters in Vienna last week, Russia declined to endorse a Saudi-led proposal to remove an extra 1.5 million bpd from the market.
The disintegration of Opec+ comes at a time of weak demand exacerbated by the coronavirus outbreak. Oil had already plunged by more than 25% since the start of the year before the breakup of the alliance.
The alliance with Russia emerged after the spectacular oil price crash of 2014. Analysts are now warning of a more serious crash, given weak demand at a time of surging supplies.
“The prognosis for the oil market is even more dire than in November 2014, when such a price war last started, as it comes to a head with the signiﬁcant collapse in oil demand due to the coronavirus,” Goldman Sachs said.