Oil shock: Coronavirus crash deepens as oil giants wage price war

Author
Liam Dann, NZ Herald,
Publish Date
Mon, 9 Mar 2020, 12:28PM
Aramco's oil processing facility in Saudi Arabia. (Photo / AP)
Aramco's oil processing facility in Saudi Arabia. (Photo / AP)

Oil shock: Coronavirus crash deepens as oil giants wage price war

Author
Liam Dann, NZ Herald,
Publish Date
Mon, 9 Mar 2020, 12:28PM

Expect to see petrol prices fall sharply in coming days after fears of a global price war sparked an historic collapse in crude oil barrel prices this morning

Oil prices plunged as much as 30 per cent as markets opened this morning - the biggest one day fall since the start of the first Iraq war in 1991.

Brent crude is now down about 23 per cent.

But this follows falls of 10 per cent at the weekend on fears that Russia and Saudia Arabia will launch a full-scale price war.

Saudi Arabia slashed the price of its crude and upped production after Opec and Russia failed to agree on a supply response to coronavirus.

The industry had hoped that major players would agree on production cuts to mitigate the impact on global demand.

But talks in Vienna failed late on Saturday (NZT).

The slowdown of the global economic activity caused by Covid-19 coronavirus has seen demand for fuel fall dramatically since January.

Prices for benchmark Brent crude and West Texas crude are now down close to 50 per cent since the most recent pre-virus peak.

The news had oil industry analysts warning of a global price war which could exacerbate an already complex set of challenges for the industry.

Some have suggested the price could now fall below US$30 for the first time since 2016.

Saudi Arabia plans to boost oil output next month to well above 10 million barrels a day, in an aggressive response to the collapse of the Opec+ alliance with Russia, Bloomberg News reported.

"Saudi Arabia is now really going into a full price war," said Iman Nasseri, managing director for the Middle East at oil consultant FGE, told the news agency.

Both Russia and Saudi Arabia appear to be playing a high stakes game in an attempt to maintain market dominance as the outbreak plays through.

The industry now has little confidence that a new attempt at a deal will be made in the next few weeks.

"This is going to get nasty," Doug King, a hedge fund investor who co-founded the Merchant Commodity Fund, told Bloomberg.

"Opec+ is going to pump more, and the world is facing a demand shock. $30 oil is possible."

The failure to come to an agreement represented "the worst-case scenario that could have happened," Manish Raj, chief financial officer at Velandera Energy, told the MarketWatch news site.

"The breakdown was a classic game theory outcome—each side stands to gain if the other side backs down. However, if neither side backs down, then they both lose," He said.

In New Zealand petrol pump prices have fallen marginally since January, but falls have been offset by the lower kiwi dollar - which boosts the cost of imports in local currency terms.

The kiwi has fallen from US66c when the virus emerged as an economic threat in mid-January to US63.5c - a fall of 4 per cent.

It has rebounded from a low of US62c last week as expectations for local interest rate cuts grow.

That suggests motorists are due to see further significant falls at the pump in the next few days.

That could offer some relief for businesses struggling with falling demand and cashflow issues due to the virus.

But longer term, the prospect of a price war, with the damage it can do to already battered market confidence, does not look like good news at all.