Why are Oil Prices Falling?

“Saudis Instigate Oil-Price Clash With Russia

Oil prices crashed to their lowest levels since 2016 after Saudi Arabian state oil giant Aramco said it plans to cut prices, a move that escalates the kingdom’s clash with Russia and threatens to unleash a torrent of crude into well-supplied energy markets.

The Saudi gambit is part of an aggressive campaign to snatch some of Moscow’s market share, according to delegates from the Organization of the Petroleum Exporting Countries and Saudi officials. It comes after a longstanding partnership between some of the world’s largest oil producers, including Saudi Arabia and Russia, splintered on Friday. The sides failed to reach an agreement on production cuts to support the price of oil in the face of the coronavirus-related economic slowdown.

Oil fell sharply to fresh multiyear lows when futures trading opened Sunday evening in New York, with U.S. crude futures sliding 20% to a roughly four-year low of $33.19 a barrel. Brent crude, the global gauge of prices, fell 20% to $36.12 a barrel on the heels of its worst day since the financial crisis more than a decade ago. Analysts cautioned that the moves late Sunday were likely to shift due to thin trading volumes and notoriously volatile crude prices. If they held, they would mark some of the biggest one-day swings ever.

The declines came after Aramco said in a notice to buyers sent Saturday that it was cutting most of its prices. It slashed its popular medium crude by $7 a barrel to the U.S., by $8 a barrel to Northern Europe and by $6 to the Far East for oil deliveries next month.

The price cuts are aimed directly at Russia’s market share, Saudi officials said, but don’t encompass the entirety of the kingdom’s strategy, as it is set to boost its crude output as well to 10 million barrels a day, up from about 9.7 million barrels a day in January. The officials said Saudi Arabia would up output next month to above 10 million barrels a day and could increase to its maximum capacity of 12 million barrels a day if needed.

Fears of an impending oil-price war sent shares of the Saudi Arabian Oil Co., as the company is formally known, sliding as much as 9% in Sunday trading in Riyadh, dropping below 30 riyals. That takes the stock below the 32 riyals per share level that the company was listed at less than three months ago.

“What makes this price war especially dangerous and historic is it breaks out simultaneously with a massive demand shock…from the coronavirus” said Robert McNally, president of Rapidan Energy Group, a Washington, D.C.-based energy-market consulting firm.

“We have not seen that toxic combination since the early 1930s when [Texas’] monster Black Giant field started up in the teeth of the Depression, sending crude oil prices down to pennies on the barrel.”