Oil Prices Crash as Saudi Wages Price War [Update 2]

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Oil prices lost more than a quarter of their value on March 9, marking the biggest single-day loss since the 1991 Gulf War, following Saudi Arabia's decision to slash prices to refiners and go for market share.

Brent crude futures had fallen 25% to $33.89/barrel at around 07:30 GMT, according to Reuters, after hitting $31.02 earlier in the day. Meanwhile US West Texas Intermediate oil was down 27% at $30.12/barrel, after bottoming out at $27.34 earlier.

Talks between Saudi Arabia, Russia and other producers in the Opec+ alliance on agreeing a co-ordinated response to the coronavirus (Covid-19) crisis broke down on March 6. Not only did the group fail to agree to scale back production by a further 1.5mn barrels/day, but they were also unable to agree to extend a previous cut of 2.1mn barrels/day. Russia's producers, who have grown increasingly weary of co-operation with Opec, opposed the moves.

In what has been widely interpreted as a retaliation to Russia's refusal to commit to cuts, Saudi Arabia cut its export oil prices by almost 10% on March 7, causing benchmarks to tank. The kingdom is also understood to be considering an increase in its production from next month, to force Russia back to the table. The Financial Times reported that the planned reduction to 9mn barrels/day could become an increase to 11mn b/d.

Russia can handle low oil prices better than Saudi Arabia, however. It has a fiscal breakeven oil price of below $50/barrel, according to Fitch Ratings, whereas Saudi Arabia needs a price of above $80/barrel to balance its budget. This suggests that Russia may not be the one to blink first.

The fall in oil prices has hit international oil companies' share price, as well as Saudi Aramco's which has lost more than 9% of its value since the December listing; it also means a drop in oil-indexed LNG prices, bringing them close to the spot JKM for northeast Asia, which closed March 5 at $3.085/mn Btu.

Among the European companies, Equinor was trading down 14.95%; Anglo-Dutch Shell B shares were down 18.9%; French Total was down 11.13%; Italian Eni was down 19.11% and UK BP was down 18.36%. Russian Lukoil was down 17.1% in sterling terms but only down 10.10% in the weaker Russian rouble; while Rosneft was down only 4.3% in roubles.

In the US later the same day, ExxonMobil shares were down 10.7%, Chevron shares were down 14.72%, ConocoPhillips shares were down 26% and Occidental shares were down 38% on the previous close. Gas-weighted producers were less impacted, and in fact, the largest gas producer in the US, EQT Corp., actually rose during the day, closing 10.5% higher.

On Canadian markets, Denver-domiciled Ovintiv - formerly Canada's EnCana - took the biggest hit, falling nearly 60% by 1:30 pm EDT on the Toronto Stock Exchange (TSX). On the New York board, it was off nearly 62%.

Seven Generations Energy was off 28.3% at 1:30 pm EDT on the TSX , while Canadian Natural Resources fell 23.6%, Advantage Oil & Gas was off 23.3%, Peyto Exploration & Development dropped 21.5% and Tourmaline Oil - Canada's biggest gas producer - fell nearly 12%.