US crude prices drop below $30 a barrel after OPEC deal failure sparks price war, oil-dependent economies left vulnerable

KEY POINTS

  • Nigeria’s $34.6 billion Budget for 2020 was benchmarked on an oil price of $57 per barrel. It expected crude oil sales to contribute 35 percent of government revenue. The oil prices’ plunge has forced the Nigerian government to review its budget.


By Pippa Stevens@PIPPASTEVENS13and Eustance Huang@EUSTANCEHUANG

Oil prices plunged after OPEC’s failure to strike a deal with its allies regarding production cuts caused Saudi Arabia to slash its prices as it reportedly gets set to ramp up production, leading to fears of an all-out price war.

U.S. West Texas Intermediate crude dropped 29.48% to $29.11 per barrel as of 05:50 GMT Monday, having earlier tumbled to a low of $27.34 per barrel. International benchmark Brent crude futures also plummeted 27.26% to $32.93 per barrel.

“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 Saturday, 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 Sunday. “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.

Saudi Arabia’s price cut followed a breakdown of talks in Vienna last week. On Thursday, 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 Friday.

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.” 

Oil prices have already moved sharply lower this year as the coronavirus outbreak has led to softer demand for crude. A potential supply glut could pressure prices further.

“Both events – coronavirus and OPEC+ falling apart were not expected or priced into the market a month ago,” said Rebecca Babin, senior equity trader for CIBC Private Wealth Management. She said the key things to watch going forward are whether or not Saudi Arabia and Russia reach a “Hail Mary” deal, and if not, how quickly U.S. supply is shut in to support prices.

“There is still significant uncertainty, but the commodity market is not waiting around to find out if miracles can happen,” she added.

The unfolding of events is reminiscent of 2014 when Saudi Arabia, Russia and the U.S. competed for market share in the oil industry. As production escalated, prices plummeted. Some see prices heading back to those lows. 

″$20 oil in 2020 is coming,” Ali Khedery, formerly Exxon’s senior Middle East advisor and now CEO of U.S.-based strategy firm Dragoman Ventures, wrote Sunday on Twitter. “Huge geopolitical implications. Timely stimulus for net consumers. Catastrophic for failed/failing petro-kleptocracies Iraq, Iran, etc – may prove existential 1-2 punch when paired with COVID19.”

But others, including Eurasia Group, believe that Saudi Arabia and Russia will eventually come to an agreement. 

“The most likely outcome of the failure of the Vienna talks is a limited oil price war before the two sides agree on a new deal,” analysts led by Ayham Kamel said in a note to clients Sunday. The firm puts the chances of an eventual agreement at 60%. 

Vital Knowledge founder Adam Crisafulli said Sunday that oil “has become a bigger problem for markets than the coronavirus,” but also said that he does not foresee prices falling to the Jan. 2016 lows. 

“Saudi Arabia can’t tolerate an oil depression – the country’s fiscal breakeven oil prices remains very high, Saudi Aramco is now a public company, and MBS’s grip on power isn’t yet absolute. As a result, the [government] won’t be so cavalier in sending oil back into the $30s (or even lower),” he said in a note to clients Sunday.

— CNBC’s Michael Bloom and Natasha Turak contributed reporting.

This article first appeared on CNBC https://www.cnbc.com/2020/03/08/oil-plummets-30percent-as-opec-deal-failure-sparks-price-war-fears.html and is republished with its permission

Related Content

COVID-19: How can Nigeria’s digital economy be unlocked?

The advent of the Covid-19 pandemic has accelerated the transition to more digitally enabled lifestyles and ways of working globally but according to the United Nations Conference on Trade and Development, gaps and risks implicit in the digital economy are more exposed by the Covid-19 shock. So how can Nigeria fully unlock its digital economy? Uzoma Dozie, Founder and CEO of Sparkle; a newly launched Nigerian digital platform says they are looking to remove barriers using technology and data. He joins CNBC Africa for more.

Nelisiwe Magubane appointed new chairperson of Strategic Fuel Fund

The Strategic Fuel Fund is the state-owned entity that manages South Africa's strategic crude oil stockpile has appointed the former director general for the Department of Energy, Nelisiwe Magubane as its new chairperson. Nelisiwe joins CNBC Africa for more on her new role amid the global oil price and output tensions.

How the COVID-19 lockdown is impacting petrol supply in SA

Petrol prices in South Africa hiked up yesterday amid most of the global economy reopening and oil supply expected to rise. However, according to concerns raised by the parliamentary portfolio committee, they may be a diesel shortage in South Africa due to the slowdown in national refinery production. Joining CNBC Africa for more is Avhapfani Tshifularo, Executive Director at the SA Petroleum Industry Association.

COVID-19: NAAMSA CEO on SA’s vehicle sector outlook for 2020

One of the hardest hit industries during the Covid-19 crisis is the automotive sector, with South Africa’s new vehicle sales for the month of May plunging by 68 per cent in and 98 per cent in April. The slowdown in car manufacturing and consumer purchasing power was due to the strict Covid-19 lockdown that was implemented by the South African government at the end of March. Joining CNBC Africa for more is Mike Mabasa, CEO, National Association of Automobile Manufacturers of South Africa.

Subscribe to our newsletter

Sign up for free newsletters and get more CNBC AFRICA delivered to your inbox

More from CNBC Africa

Nigeria’s president backs embattled African Development Bank chief

ABUJA (Reuters) - Nigerian President Muhammadu Buhari on Tuesday gave his backing to the head of the African Development Bank (AfDB), Akinwumi...

COVID-19: Nigeria eyes resumption of domestic flights from June 21st

Nigeria’s aviation sector may resume domestic operations from the 21st of June this year according to the Presidential Task Force on COVID-19. Meanwhile, the Nigeria Civil Aviation Authority says only five airports will be operational when the restrictions are lifted. Gbenga Olowo, President of the Aviation Roundtable joins CNBC Africa for more.

COVID-19: How can Nigeria’s digital economy be unlocked?

The advent of the Covid-19 pandemic has accelerated the transition to more digitally enabled lifestyles and ways of working globally but according to the United Nations Conference on Trade and Development, gaps and risks implicit in the digital economy are more exposed by the Covid-19 shock. So how can Nigeria fully unlock its digital economy? Uzoma Dozie, Founder and CEO of Sparkle; a newly launched Nigerian digital platform says they are looking to remove barriers using technology and data. He joins CNBC Africa for more.

Nelisiwe Magubane appointed new chairperson of Strategic Fuel Fund

The Strategic Fuel Fund is the state-owned entity that manages South Africa's strategic crude oil stockpile has appointed the former director general for the Department of Energy, Nelisiwe Magubane as its new chairperson. Nelisiwe joins CNBC Africa for more on her new role amid the global oil price and output tensions.

Partner Content

Sanlam Emerging Markets and its partners on the African continent invest over $12 million to fight COVID-19

As we go through this global pandemic together, it is the little things we miss. A high five, a handshake, a walk...

VIVO CEO is a dynamic leader for this innovative global brand

May 2020 -- Six months ago the vision for vivo in South Africa was just beginning to...

Trending Now

COVID-19 lock-down: Rwanda permits taxi-moto operations & inter- provincial travel

This morning it was announced that taxi motos are now permitted to accept passengers again after over two months of being off the road due to the dangers around the spread of Covid-19. This is good news not only for many of the 45,000 taxi-motorists in the country that depend on the income, but also for the thousands of citizens that they transport daily. CNBC Africa spoke to analyst, Moses Gahigi for more.

President Buhari to AfDB President Adesina: “I’ll stand by you”

While hosting African Development Bank (AfDB) President Akinwumi Adesina on a courtesy visit at State House on Tuesday, Nigerian President Muhammadu Buhari said the country will support Adesina in his bid to get re-elected as President of the multilateral bank.

NSE looks to deepen sustainable finance market segments in West Africa

The Nigeria Stock Exchange in collaboration with the Milken Institute is set to host the inaugural edition of the Webinar Series on Sustainable Capital Markets Forum geared towards promoting Green Finance in West Africa. Jude Chiemeka, Head of Trading Business Division of the Nigerian Stock Exchange joins CNBC Africa for more.

COVID-19: Investing for Roubini’s Greater Depression

“The lessons learned from the GFC encouraged policymakers worldwide to work furiously to get economies back into shape through a series of fierce and co-ordinated policy responses to the impacts of Covid-19. In turn, this has encouraged a consensus view amongst economists that the recovery from the crisis will be V-shaped,” writes Cannon Asset Managers CE Adrian Saville.
- Advertisement -