The US Dow is expected to open as much as 1,200 points down Monday morning and the yield on the US 10-year treasury dipped below .5% for the first time in history on Sunday night as investors fled for safe havens.
Saudi Arabia made the decision to cut oil prices putting additional pressure on oil markets already in reverse stemming from a global economic growth slowdown that preceded but continued with the spread of the coronavirus outbreak, named Covid-19.
Consumers might welcome this, but stock markets will be reeling, as well as oil companies and their massive workforces.
Why is this happening?
Epic OPEC showdown
Saudi Arabia had pushed last week for a steep cut in production by OPEC countries and non-OPEC oil producer Russia. The idea was to prevent a further collapse of the oil prices infected by a global decline in demand because of Covid-19. But Russia did not want to lose market share to the Americans.
Mikhail Leontiev, a spokesman for the Russian oil giant Rosneft explained in reports: “This deal [to cut production] is simply meaningless,” Leontiev told the Ria Novosti news agency Sunday.
“We, yielding our own markets, remove cheap Arab and Russian oil from them in order to clear a place for expensive American shale. And to ensure the efficiency of its production. Our volumes are simply replaced by the volumes of our competitors. This is masochism.”
The disintegration of the grouping called OPEC+ ends more than 3 years of co-operation on supporting the market. Saudi Arabia plans to boost its crude output above 10 million barrels per day (bpd.) in April after the current deal to curb production expires at the end of March, two sources told Reuters on Sunday.
“Saudi Arabia and Russia are entering into an oil price war that is likely to be limited and tactical,” Eurasia Group said in a note. “…a painful process that lasts several weeks or months, until prices are low enough to change fundamental views in Moscow and Riyadh back (to) some form of compromise on resumed OPEC+ production restraint.”
A production-cut agreement could still happen. An advisory-level OPEC meeting is scheduled for later this month, and the Russians have said they are open to further talks.
Turning on the oil faucets
Saudi Arabia has flooded the market with hundreds of thousands of barrels of additional oil per day and offered steep discounts to refineries worldwide, sparking predictions of oil prices falling even lower Monday, according to Bloomberg News and as reported by the Washington Post.
Brent crude oil futures tanked as much as 31% to $31 a barrel on Sunday, while West Texas Intermediate (WTI) crude fell from about $41 to $32 a barrel Sunday night, a low not seen in four years.
″$20 oil in 2020 is coming,” Ali Khedery, a former U.S. official in Iraq and onetime Middle East expert with Exxon, wrote on Twitter.
This is an opinion shared by Goldman Sachs.
“The prognosis for the oil market is even more dire than in November 2014, when such a price war last started. … we are cutting our 2Q and 3Q20 Brent price forecasts to $30/bbl with possible dips in prices to operational stress levels and well-head cash costs near $20/bbl,” Goldman Sachs oil strategist Damien Courvalin said in a note to clients.
The Saudi oil company Aramco is offering discounts of between $6 and $8 for delivery in April, it announced late Saturday. On Sunday, for the first time on the Saudi exchange, Aramco shares fell below their original IPO price of SAR 32 last December.