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  • Brent crude, the international benchmark, dropped from US$45 a barrel to US$31.02 a barrel in one of the biggest one-day drops in its history and U.S. West Texas Intermediate (WTI) crude fell to US$30 a barrel. 

    Brent crude, the international benchmark, dropped from US$45 a barrel to US$31.02 a barrel in one of the biggest one-day drops in its history and U.S. West Texas Intermediate (WTI) crude fell to US$30 a barrel.  | Photo: EFE

Published 8 March 2020

Starting what many experts consider an all-out price war, the kingdom’s decision caused the biggest percentage drop since Jan. 17, 1991, at the start of the first Gulf War and the lowest since Feb. 12, 2016. 

Oil prices plunged about 30 percent on early trading Sunday evening after Saudi Arabia slashed its selling prices and pledged to unleash stored supply onto the market. 

RELATED:
OPEC Backs Biggest Oil Cut Since 2008 Crisis, Awaits Russia

Starting what many experts consider an all-out price war, the kingdom’s decision caused the biggest percentage drop since Jan. 17, 1991, at the start of the first Gulf War and the lowest since Feb. 12, 2016. 

Brent crude, the international benchmark, dropped from US$45 a barrel to US$31.02 a barrel in one of the biggest one-day drops in its history and U.S. West Texas Intermediate (WTI) crude fell to US$30 a barrel. 

This resulted after the kingdom announced a discount, starting April, of US$6 to US$8 per barrel to its customers in Asia, Europe, and the United States, adding it would boost oil production despite the global economic slowdown and crude demand drop due to the coronavirus outbreak, especially from the biggest importer: China. 

The move comes after the two biggest oil producers in the world, Saudia Arabia and Russia, failed on Friday - during the Organization of the Petroleum Exporting Countries’ (OPEC) meeting - to reach a deal regarding production cuts. 

“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. OPEC and other producers supported the cuts to stabilize falling prices caused by the economic fallout from the coronavirus outbreak.

Now Saudi Arabia plans to boost crude output above 10 million barrels per day (bpd) in April after the current supply deal between OPEC and Russia, - known as OPEC+ - expires at the end of March, two sources told Reuters on Sunday.

“The most likely outcome of this crisis is entrenchment into a painful process that lasts several weeks or months until prices are low enough to ... some form of compromise on resumed OPEC+ production restraint,” the group added.

As the demand slump continues due to the spread of the coronavirus to other major economies such as Italy and South Korea and the burgeoning cases in the United States traders fear that this is just a first move in many to come. According to Goldman Sachs prices could drop down to US$20 per barrel. 

“It is very rare for a demand collapse to coincide with a supply surge,” Bob McNally at the Rapidan Energy Group told the Financial Times, adding that “it is the crudest price-bearish combination since the early 1930s. The price collapse has just begun.”

Major banks such as Morgan Stanley and Goldman Sachs have cut their demand growth forecasts, with Morgan Stanley predicting China will have zero demand growth in 2020 while Goldman is seeing a contraction of global demand of 150,000 barrels per day.

In other markets, the dollar was down sharply against the yen, Asian stock markets were set for big falls and gold rose to the highest since 2013 as investors fled to safe havens.

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