Oil prices plunged to multi-year lows on Monday as tensions between Russia and Saudi Arabia escalate, sparking fears on the Street that an all-out price war is imminent.
The sell-off in crude began last week when OPEC failed to strike a deal with its allies, led by Russia, about oil production cuts. That, in turn, caused Saudi Arabia to slash its oil prices as it reportedly looks to ramp up production
WTI plunged 24.59%, or $10.15, to settle at $31.13 per barrel. It was WTI’s second worst day on record. International benchmark Brent crude slid $10.91, or 24.1%, to settle at $34.36 per barrel.
Earlier in the session each contract fell more than 30%. WTI dropped to $30 while Brent traded as low as $31.02, both of which were the lowest levels since Feb. 2016.
On Saturday, Saudi Arabia announced massive discounts to its official selling prices for April, and the nation is reportedly preparing to increase its production above the 10 million barrel per day mark, according to a Reuters report. The kingdom currently pumps 9.7 million barrels per day, but has the capacity to ramp up to 12.5 million barrels per day.
Goldman cut its second and third quarter Brent forecast to $30 per barrel, and said that prices could dip into the $20s.
Saudi Arabia’s price cut followed a breakdown of talks in Vienna last week. On Thursday, OPEC recommended additional production cuts of 1.5 million barrels per day starting in April and extending until the end of the year. But OPEC ally Russia rejected the additional cuts when the 14-member cartel and its allies, known as OPEC+, met on Friday.
“As from 1 April we are starting to work without minding the quotas or reductions which were in place earlier,” Russian Energy Minister Alexander Novak told reporters Friday at the OPEC+ meeting in Vienna, adding, “but this does not mean that each country would not monitor and analyze market developments.”
Oil prices have already moved sharply lower this year as the coronavirus outbreak has led to softer demand for crude. A potential supply glut could pressure prices further.
“There is still significant uncertainty, but the commodity market is not waiting around to find out if miracles can happen,” she added.
The XLE, which tracks the energy sector, and the XOP, which tracks oil and gas companies, fell 19% and 29%, respectively, on Monday.
The unfolding of events is reminiscent of 2014 when Saudi Arabia, Russia, and the U.S. competed for market share in the oil industry. As production escalated, prices plummeted. Some see prices heading back to those lows.
″$20 oil in 2020 is coming,” Ali Khedery, formerly Exxon’s senior Middle East advisor and now CEO of U.S.-based strategy firm Dragoman Ventures, wrote Sunday on Twitter. “Huge geopolitical implications. Timely stimulus for net consumers. Catastrophic for failed/failing petro-kleptocracies Iraq, Iran, etc – may prove existential 1-2 punch when paired with COVID19.”
But others, including Eurasia Group, believe that Saudi Arabia and Russia will eventually come to an agreement.
“The most likely outcome of the failure of the Vienna talks is a limited oil price war before the two sides agree on a new deal,” analysts led by Ayham Kamel said in a note to clients Sunday. The firm puts the chances of an eventual agreement at 60%.
Vital Knowledge founder Adam Crisafulli said Sunday that oil “has become a bigger problem for markets than the coronavirus,” but also said that he does not foresee prices falling to the Jan. 2016 lows.
“Saudi Arabia can’t tolerate an oil depression – the country’s fiscal breakeven oil prices remain very high, Saudi Aramco is now a public company, and MBS’s grip on power isn’t yet absolute. As a result, the [government] won’t be so cavalier in sending oil back into the $30s (or even lower),” he said in a note to clients Sunday.