The Oil Wars Have Begun

After a deal between Russia and OPEC could not be reached, oil prices were sent to levels it has not seen since 2016. Russia was hoping to broker a deal with Saudi Arabia in which overall oil production would be reduced. The major oil-producing company refused to cut production. In fact, they did the opposite – announcing that they would increase production.

After the deal with Russia failed, Aramco drastically cut the price of oil unexpectedly. The severe price drop will probably cause a large loss for Saudi oil – but it will not hurt them much – unless it continues for a long time. It appears that they are trying to corner more of the market.

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Oil prices (WTI crude) have dropped as much as 25.90 percent, or $10.69, leaving oil to go for $30.59 per barrel. Brent crude dropped almost as much – by 25.12%, or $11.37, stopping at $33.90 per barrel.

Almost immediately after the announcement of the failed agreement, Aramco announced that it was offering lower oil prices to various parts of the world – starting a price war. It lowered its price to Europe by $8, to the U.S. by $7, and to Asia by $6. Their willingness to drop oil prices so much indicates that there is less of a demand for oil around the world – and less profit to be made.

Aramco also announced that it intends to increase its production. Currently, the country is producing around 10 million barrels per day but it is believed that it could max out at 12 million bpd. Next to the United States, Saudi Arabia is the largest producer of oil, and Russia is the third-largest producer.

In response to the Saudi’s action, Russia has said that it will also aim to increase its production. This will help it to keep some of their market share.

The demand for oil continues to drop as coronavirus impacts more countries and people. People are becoming more reluctant to travel by air or on ship. A couple of cities have been put on quarantine in Italy, involving more than 12 million people, which means fewer cars on the road. The airline industry may be talking about massive layoffs.

Although oil is now much cheaper than it has been for a long time, it does not guarantee that there will be buyers for OPEC or Russian oil. While the average person on the street may enjoy the price decreases, there are not as many of them – at least not until coronavirus blows over.

Stock markets are being affected by this new development. Asian stock markets have already been affected. Japan’s Nikkei 225 fell 6.15% this morning, and Topix dropped by 6.07%. Other markets that fell include the Hang Seng Index and South Korea. The Australian market dropped almost as much as the Japanese market – by 6%.

In the United States, the announcement from Aramco greatly affected the U.S. stock market. Dow futures lost 1,200 points and other stock markets also suffered a loss.

Coronavirus continues to impact the world economically. There have now been more than 110,000 confirmed cases and more than 3,800 deaths. It is also now in 110 countries. Today, there were more than 4,000 new cases worldwide. It continues to look like it will be around a while longer – and China has not yet returned to work.

About Mike Valles

One comment

  1. Edouard d'Orange

    Grammar mistake. Russia paragraph. “This will help it to keep some of their market share”. “Their” should be “its”. Had I received this article yesterday, instead of today, I would have found it more relevant. Today, there’s a rally.

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