What’s behind the biggest fall in oil prices for almost 20 years?
At the start of what analysts are already calling a “price war”, oil prices crashed in Asia by around 30% last week. This marks the biggest fall in cost per barrel since the day in 1991 when US forces launched air strikes on Iraqi troops after the invasion of Kuwait.
Saudi Arabia – the world’s top oil exporter – slashed its oil prices after failing to convince Russia to support sharp cuts to production. Oil cartel OPEC has previously worked with Russia on production curbs, having formed the OPEC+ alliance in 2016 when prices last suffered a significant drop.
Why are prices crashing?
The 14 members of the OPEC cartel – led by Saudi Arabia – originally met with Russian allies and other non-OPEC members in order to discuss how best to respond to failing demand caused by the growing spread of the coronavirus.
But the two sides could not agree on measures to cut oil production by up to 1.5 million barrels a day. In response, Saudi Arabia launched the oil price war, and prices have been dropping since.
Initial impacts saw Brent crude futures, the global oil benchmark, drop below $50 a barrel. At present, prices have fallen to a low of $31.02 per barrel after Saudi Arabis sharply cut the prices it charges customers. The region is home to major importers such as Japan, China, India and South Korea.
Global oil production is now significantly outpacing demand. As such, OPEC members are no expected to pump more oil to capture the market.
In a research note, oil analyst Martjin Rats of Morgan Stanley comments: “Given OPEC countries now have very little incentive to restrain production, oil markets look sharply oversupplied.”
Speaking to the BBC, energy analyst Vandana Hari of Vanda Insights research firm expressed shock on behalf of the markets following the disagreement on production costs between OPEC and Russia. Just last year, the alliance surpassed the US as the world’s top producer.
Hari comments: “The collapse of the OPEC/non-OPEC alliance is a major shock to the oil market, and it comes with the added challenge that we don’t have the full picture of what lies ahead.”
Which countries will be hurt the most?
It’s hard to see any winners in this price war. The biggest oil producing countries are set to lose money regardless of how much market share they can rescue. Meanwhile, Gulf countries like Kuwait and the United Arab Emirates need a price around $70 a barrel or higher to balance their budgets, due to high government spending and generous subsidies for citizens.
Oil dependent countries like Libya, Venezuela, Iraq and Iran have all suffered from years of conflict and sanctions, meaning they will likely pay the heaviest price in this war. The US and the UK will feel the impact too, as low prices will hurt oil companies.
What is the impact on consumers?
One potential positive takeaway from this situation that importing nations may experience some much-needed relief through falling prices, and consumers benefit in general from lower energy bills – not to mention declining petrol costs.
But any reduction in oil and gas prices will most likely be outweighed by the disruption to the economy caused by the coronavirus. Global stock markets have crashed around the world due to the impact of the virus’ spread and the oil price war. The full consequences of the coronavirus spread remain unclear.
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