09.03.2020 – Special Report. Flash crash with oil: Saudi Arabia fired the first volley in the price war against Russia. Last week, Moscow had opposed a supply brake and let the OPEC meeting in Vienna fail. At the weekend, the Saudis lowered prices. They also want to increase production. Analysts see a drop in the oil price down to 20 dollars.
Bloodbath in oil prices
These are interesting times for traders: On Monday, the price of North Sea crude oil fell by 31.5 percent to 31.02 dollars per barrel. A barrel of US oil of the WTI variety has since fallen by 27.5 percent to 30 dollars a barrel. Only on 17 January 1991 was the loss higher, at 33 percent, when the First Gulf War broke out. Oil prices had thus fallen to their lowest level since early 2016. The low can hardly be sounded out. Although a countermovement is due after the sharp slump. But Riyadh and Moscow seem to be wildly determined to fight out the conflict.
Moscow satisfied with low prices
Russia opposes OPEC: Moscow can supposedly live well with lower prices. The Russian Federation wants to maintain market shares and above all destroy US companies. According to the “Moscow Times”, Russian President Vladimir Putin already said last Sunday that current oil prices were acceptable and sufficient to support the Russian economy. The Saudis have so far relied on high prices to support their own ailing economy and the stock market value of Saudi Aramco. That is now over.
Declaration of war from the Kremlin
Last week Moscow rejected OPEC’s proposal to cut production by 1.5 million barrels per day. The cartel had been in agreement – only the Russians backed out. On Friday, Russian Oil Minister Alexander Nowak told journalists at the OPEC+ meeting in Vienna that Russia would no longer adhere to any quotas or production brakes from 1 April. This was the first time in six years that an OPEC meeting had ended without agreement. Bloomberg commented that the draft final document reads like a divorce paper. Saudi oil minister Prince Abdulaziz bin Salman told delegates after the failed meeting that “today will be a day of regret”.
Riyadh bets on scorched earth
And over the weekend, Saudi Arabia fired back. On the one hand, Aramco lowered the forward prices for all regions across all products for delivery in April by 6 to 8 dollars per barrel.
In addition, according to CNBC, the kingdom is apparently facing a 2 million barrel per day increase in production; the station picked up on a report from Bloomberg. The “Wall Street Journal” also reported an imminent increase in production.
Reuters reported that the Saudis would increase production to over 10 million barrels per day. Currently, the country pumps 9.7 million barrels per day, but the maximum capacity is 12.5 million barrels. Saudi Arabia has by far the lowest production costs and therefore made a profit even at the lowest prices.
Oil spill ahead
The market was accordingly shocked. “Complete pandemonium at the open,” wrote Stephen Innes, chief strategist at Australian currency and CFD trader AxiCorp, late Sunday. And further: “The shock-and-awe Saudi strategy will propel oil markets into a period of radical uncertainty. Russia balking was one thing, but Saudi ramping up production is a bird of another feather.”
OPEC members were now preparing for a price war, soon they would publish plans to increase production, wrote Edward Bell, Commody analyst at the state-owned Emirates NBD, formerly known as the National Bank of Dubai. Specifically, Bell said: “Should OPEC+ members choose to raise output from Q2 onward, a wave of oil will be unleashed onto markets,” and further: “We expect to see Saudi Arabia, the UAE and other large producers in OPEC increase production over the rest of 2020 as they return to a market-share strategy rather than price targeting.
20 dollars in 2020
The consequence of all this would, of course, be a further sharp fall in prices. “$20 oil in 2020 is coming,” tweeted Ali Khedery, a former consultant for Exxon in the Middle East and now head of the US management consultancy Dragoman Ventures, on Sunday. Goldman Sachs said on Sunday that the price could plummet into the 20 regions. Together with Covid-19, the situation on the oil market is now even worse than in November 2014, when a similar battle drove prices down to 30 dollars a barrel by early 2016.
US oil industry must go to the scaffold
The share prices of the major energy companies are now likely to plummet. And the American and Canadian tar sand and oil shale producers in particular are facing hard times. According to Moody’s, the oil and gas industry in the USA is heavily indebted: Over the next four years, small companies will be owed 86 billion dollars in loans. Almost everything at or just above junk level. As Jeffrey Halley, market strategist at New York broker Oanda wrote on Sunday, “U.S. shale and Canadian tar sands are in for a nightmarish year, I fear.” “Production becoming a battle of who has the deepest pockets.”
As it seems, the Russians’ cheap strategy is also a payback for attempts in Washington to sabotage the Nord Stream 2 gas pipeline. About three weeks ago, Washington also imposed sanctions on the state-owned oil multinational Rosneft for transporting oil from Venezuela. Rosneft is run by the grey eminence in Russia: Igor Sechin, a close friend of Putin.
RTS, rubles, TASI under pressure
Who else loses? Above all, stock markets of countries that now have a huge hole in their budget because the oil price continues to fall. First and foremost the Saudi stock exchange with its Tadawul All Share Index (TASI).
Sooner or later Russia, too, is likely to feel the effects of falling oil prices – oil and gas account for almost the entire national budget. However, Moscow is sitting on high currency and gold reserves and is not in debt. So the Kremlin has a long way to go. Nevertheless: The RTS index will have a hard time getting out of turbulences. The ruble has already reacted to the recent development with a weakness attack and slid against the dollar to 73.50, its lowest level in four years.
But beware: After such a sharp slump, it is only a matter of time before massive speculators enter the futures market and pull the oil price up again. Especially if the Saudis and the Russians send out signals of reconciliation or even sit down at the same table. Especially since the global economy is likely to pick up again at some point after Corona and the economy is facing a huge pent-up demand. And note: In politics, no chart analysis helps – so you should keep your trading platform open and keep an eye on the regular market updates. The Bernstein-Bank wishes you much success with your trades!
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