Crude Price War

03/09/2020 12:00 pm EST

Focus: ENERGY

Phil Flynn

Senior Energy Analyst, The PRICE Futures Group

With Russia failing to agree to OPEC led production cuts, Saudi Arabia pulled the nuclear option and massively cut crude prices leading to a more than 20% drop in price, reports Phil Flynn 

Say goodbye to OPEC +1 and maybe farewell to many shale producers as oil prices crash after Russian decided not to go along with OPEC production cuts. So, in an irresponsible move, Saudi Arabia lashed out at Russian insurance going after the customer and cutting oil prices by $6 to $8 a barrel. That set off a parish crash more significant than the biggest crash since the United States and coalition allies started dropping bombs in the first Gulf War. 

The ramifications from this price war go far beyond the energy industry and could cause more significant problems for a struggling global economy. For Saudi Arabia, Russia is irresponsible to make this move because they are on their own decision to take the role of oil global central bank and a central bank should not act with total disregard for its mission. The mission they tell us was price stability for the good of the world, but now that just wipes away its credibility.

Saudi Arabia, over the weekend, cut its official selling prices for April for all crude grades to all destinations by between $6 and $8 a barrel, and now it is being reported that Russia Rosneft is cutting production. Russia says it can stand this for six to 10 years of sub-par $25.00 barrel.

Market Watch reported that the "International Energy Agency on Monday issued a stunning forecast, now projecting oil demand to fall this year on the same day prices collapsed by some 20%. The IEA cut its global oil demand view, now seeing a 90,000 barrel a day decline this year, from a previous forecast of an 825,000 barrels a day increase. "This will be a price war significant casualties as we see the first demand drop since 2009.

The good news is gas prices could crash; we could see huge drops in gasoline, as far as sub $2 a gallon. Reports that oil company CEOs are putting halts to projects. Reports show Russia's Ministry of Finance says it will support the Russian ruble, which collapsed overnight, by selling FX from the National Welfare Fund. 

Reports show that Saudi Aramco plunged 10% — Riyadh's stock market daily limit— to 27 riyals, well below the IPO price of 32 riyals. Aramco market cap has fallen now to $1.44 trillion, with Apple (AAPL) at $1.26 trillion, closing in as the world's top companies as they grapple with a collapse in fuel demand because of the Coronavirus. At least six refiners from China to Singapore said they'd nonetheless try to maximize their purchases from the kingdom, storage capacity permitting. State-run Saudi Aramco has started to receive expressions of interest for extra oil, an industry official said separately.

Trade strategy may be key to ride out the crazy moves that will come with the headlines so keep in touch with our daily analysis. Makes sure you are getting my Daily Trade Levels! Read Phil’s energy report at Price Futures Group. Twitter: @energyphilflynn | Facebook: Phil Flynn

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