The price of crude oil has plunged by almost 27% after Saudi Arabia, the world’s top oil exporter, said it would step up production from next month, flooding global markets and most likely depressing petrol and diesel prices.
Brent crude was at $33.09 a barrel on Monday morning, a fall of 27%. It was the worst one-day fall for Brent since the start of the first Gulf war in 1991. US crude fell 27% to $30.
The safe-haven yen surged against emerging market currencies that have a large exposure to oil, including the Russian rouble and Mexican peso, as analysts saw danger ahead.
Helima Croft, head of global commodity strategy at RBC Capital Markets, said: “Today’s price action puts at risk the fiscal health of the vast majority of sovereign producers and budget cuts and increased debt loads are now looming in the event of a prolonged period of low prices. For the most politically and economically fragile producer states, the reckoning could be severe.”
The shock decision by the state oil company Aramco over the weekend came in response to Russia’s refusal to join an Opec plan to cut supplies. Aramco will boost its crude output significantly above 10m barrels per day (bpd) in April, after a previous agreement to limit supplies agreed by Opec and Russia expires at the end of March.
As oil prices plunged, the International Energy Agency (IEA) – a body established to monitor the security of global oil supplies – said demand for oil would shrink for the first time in a decade this year because of the impact of the coronavirus.
The Paris-based agency expects global oil demand to fall by 90,000bpd. Last year it predicted demand would grow by 825,000bpd in 2020.
Fatih Birol, the IEA’s executive director, said: “The coronavirus crisis is affecting a wide range of energy markets – including coal, gas and renewables – but its impact on oil markets is particularly severe because it is stopping people and goods from moving around, dealing a heavy blow to demand for transport fuels.”
A barrel of Brent crude has been almost halved in price since the start of December, when it stood at more than $66. Prices dropped by almost 10% on Friday after news broke that the planned Opec deal had foundered.
On Saturday, Aramco slashed its official selling price for April for all its crude grades to all destinations.
Higher production and price cuts by Aramco are likely to push world prices down further, hurting countries that rely on oil exports for tax income and foreign exchange, especially in Africa, south-east Asia and South America.
The new strategy adopted by Riyadh appears to target Russia and US shale oil firms, many of which are known to have high production costs and lose money when crude prices fall below $50 a barrel for more than a few months.
Other Opec producers, such as Iraq, Kuwait and the United Arab Emirates, are expected to follow Saudi Arabia’s lead with price cuts and increased production from April.
The Saudi decision came after marathon talks at the Opec headquarters in Vienna, when the Russian energy minister, Alexander Novak, said that from 1 April neither Opec nor non-Opec countries had any restrictions on production.
The sources said April’s production would be significantly higher than 10m bpd, possibly closer to 11m bpd. In the past couple of months, Saudi Arabia has been pumping 9.7m bpd.
Saudi Arabia has an oil output capacity of 12m bpd, giving it the ability to swiftly increase production.
China’s fast-growing economy was responsible for around 80% of global oil demand growth last year according to the IEA, but the coronavirus has forced the country to shut factories and refineries across the key industrial province of Hubei, and left tankers of crude stranded off its coast.
The IEA’s latest report pins global oil demand at 99.9m barrels a day this year, but it admitted that Covid-19 could drive demand lower than these predictions if countries failed to contain the virus.
The world’s oil demand could contract by as much as 730,000 barrels a day in 2020 in a “worst case” scenario. If the virus is contained quickly around the world, global oil demand could grow by 480,000 barrels a day, according to the IEA.
“The coronavirus crisis is adding to the uncertainties [which] the global oil industry faces as it contemplates new investments and business strategies,” the IEA’s Birol said. “The impact of the coronavirus on oil markets may be temporary. But the longer-term challenges facing the world’s suppliers are not going to go away, especially those heavily dependent on oil and gas revenues.”
