Oil prices plunged more than 26%, after OPEC failed to strike a deal with its allies regarding production cuts.
As a result, Saudi Arabia slashed its prices as it reportedly prepares to ramp up production, potentially leading to an all-out price war.
U.S. West Texas Intermediate crude dropped 27.62% to $29.88 per barrel as of 06:33 GMT March 9th, having earlier tumbled to a low of $27.34 per barrel. International benchmark Brent crude futures also plummeted 26.4% to $33.32 per barrel. Brent futures were down more than 30% at their lows.
“This has turned into a scorched Earth approach by Saudi Arabia, in particular, to deal with the problem of chronic overproduction,” Again Capital’s John Kilduff said. “The Saudis are the lowest cost producer by far. There is a reckoning ahead for all other producers, especially those companies operating in the U.S shale patch.”
On March 7th, 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.
“We believe the OPEC and Russia oil price war unequivocally started this weekend when Saudi Arabia aggressively cut the relative price at which it sells its crude by the most in at least 20 years,” Goldman Sachs analyst Damien Courvalin said in a note to clients. “The prognosis for the oil market is even more dire than in November 2014, when such a price war last started, as it comes to a head with the significant collapse in oil demand due to the coronavirus,” the firm added.
Goldman cut its second and third quarter Brent forecast to $30 per barrel, and said that prices could dip into the $20s.
The announcement by Saudi Arabia followed a breakdown of OPEC talks in Vienna. On March 5th, 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 the next day.
The meeting also concluded with no directive about the production cuts that are currently in place but set to expire at the end of the month. This effectively means that nations will soon have free rein over how much they pump.
“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.”
Meanwhile, the ruble fell against the dollar to 72.5 and to the euro to 82.7 amid falling oil prices.
Oil quotes fell by almost 30% after the news that the OPEC + participants could not extend the agreement to reduce production.
This constitutes the biggest fall in oil prices since 1991, when there was a war in the Persian Gulf.
Saudi Arabia is attempting to punish Russia, the world’s second-largest producer, for not supporting the production cuts proposed last week by the Organization of the Petroleum Exporting Countries (OPEC).
Saudi Arabia, Russia and other major producers last battled for market share like this between 2014 and 2016 to try to squeeze out production from the United States, which has grown to become the world’s biggest oil producer as flows from shale oil fields doubled its output over the last decade.