Oil dives 31% in worst loss since 1991 Gulf War as all-out price war erupts

Saudi Aramco's unprecedented pricing move came just hours after the talks between Opec and its allies ended in dramatic failure.
Saudi Aramco's unprecedented pricing move came just hours after the talks between Opec and its allies ended in dramatic failure. PHOTO: REUTERS

SINGAPORE (BLOOMBERG, REUTERS) - Oil markets tumbled the most since the Gulf War in 1991 on Monday (March 9) after the disintegration of the Opec+ alliance triggered an all-out price war among the world's biggest producers.

In one of the most dramatic bouts of selling ever, Brent futures sank by 31 per cent in a matter of seconds after the open of trading in Asia on Monday after already suffering their biggest loss since the global financial crisis at the end of last week. As Brent collapsed as low as US$31 a barrel, Goldman Sachs Group warned prices could drop into the US$20s.

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 versus renewable energy.

Hammered by a collapse in demand due to the coronavirus, the oil market sank deeper into chaos on the prospect of a supply free-for-all. Saudi Arabia over the weekend slashed its official prices by the most in at least 20 years and signalled 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.

"It's unbelievable, the market was overwhelmed by a wave of selling at the open," said Mr Andy Lipow, president of Houston energy consultancy Lipow Oil Associates. "Opec+ has clearly surprised the market by engaging in a price war to gain market share."

Brent for May settlement tumbled as much as US$14.25 a barrel to US$31.02 on the London-based ICE Futures Europe Exchange, the biggest intraday loss since the US-led bombing of Iraq in January 1991. It was trading 29 per cent lower at US$32.22 a barrel as of 12:04pm in Singapore.

West Texas Intermediate crude slumped 31 per cent to US$28.29 a barrel after sliding to as low as US$27.90 a barrel earlier. Trading was frozen for the first few minutes because of the scale of the loss.

The freefall in oil also ricocheted across financial markets. Futures on the S&P 500 Index cratered as much as 5 per cent in New York  trading, triggering trading curbs,

Several Asian markets suffered their worst falls since the 2008 global financial crisis.

Japan's Nikkei sank 5.1 per cent at the close while Australia's commodity-heavy market dived to close down 7.3 per cent. South Korea's Kospi index was trading  down 4.3 per cent.

The Hong Kong and China markets were less hammered. The Hang Seng index fell 3.8 per cent while the Shanghai Composite index dropped 2.8 per cent.

In Singapore, the Straits Times Index was down 142.91 points or 4.8 per cent to 2,818.07 as of 2:13pm.

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 was 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 in 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 threatens to impact global supply and demand balances more directly than those within the U.S. The price differential was US$2.77 a barrel, narrowing from an average of more than US$4 last week.

Saudi Aramco's unprecedented pricing move came just hours after the talks between Organisation of Petroleum Exporting Countries (Opec) and its allies ended in dramatic failure. The break-up of the alliance effectively ends the cooperation between Saudi Arabia and Russia that has underpinned oil prices since 2016.

The cuts in monthly pricing by state producer Saudi Aramco were the first indication of how the Saudis would respond, an opening salvo in the impending price war. Offering huge discounts in Asia, Europe and the United States, the world's biggest exporter will be hoping to entice refiners to purchase Saudi crude at the expense of other suppliers.

At the same time, Aramco has privately told some market participants that it plans to raise production well above 10 million barrels a day next month and could even reach a record 12 million barrels a day, according to people familiar with the conversations, who asked not to be named to protect commercial relations.

The prospect of another price war is spooking traders who will remember the crash that began in 2014, when an explosion in US shale production prompted Opec to open the spigots in an attempt to suppress prices and curtail shale output.

That strategy ended in failure, with shale producers proving too resilient and Brent crude tumbling below US$30 a barrel in 2016 amid a global glut of crude. And it was that crash that prompted Opec to club together with Russia and others to curtail output and help shore up their oil-dependent economies.