Oil crashed more than 30% after the breakup of the Opec+ alliance triggered an all-out price war, with both Russia and Saudi Arabia poised to flood the market with cheap oil.
The former allies pledged swift retribution for the collapse of the cartel’s meeting last week, with the Gulf kingdom slashing its official crude prices and threatening record production, while Russia’s largest producer said it will ramp up output next month. They risk swamping the market just as the coronavirus causes the first contraction in oil demand since 2009, according to the International Energy Agency.
"The situation we are witnessing today seems to have no equal in oil market history," said IEA executive director Fatih Birol. "A combination of a massive supply overhang and a significant demand shock at the same time."
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. The international oil benchmark plummeted to as low as $31.02 a barrel and Goldman Sachs Group Inc warned it could drop near $20.
The cataclysmic price 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.
Brent for May settlement tumbled as much as $14.25 a barrel to $31.02 on the London-based ICE Futures Europe Exchange. It was trading down 22% at $35.29 as of 11.56am local time.
West Texas Intermediate crude for April slumped as much as 34% to $27.34 a 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 an unambiguous declaration of intent to flood the market with crude.
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.
Russia’s state oil company Rosneft PJSC is planning to lift oil production as soon as the current Opec+ deal ends, according to a person close to the company. That suggests the company could start ramping up output on April 1 and add 300,000 barrels a day within weeks of that date.
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 US 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 US.
The freefall in oil also ricocheted across financial markets. US equity futures nosedived, along with oil currencies including the Norwegian krone and Mexican peso, while havens such as the Japanese yen and gold jumped. Shares of European oil producers tumbled the most on record, dragged down by heavyweights including Royal Dutch Shell Plc, BP Plc and Total SA.