Oil prices crashed by as much as 30 percent after Saudi Arabia fired the first shots in a price war, in crude’s biggest one-day fall since the early 1990s Gulf war. Riyadh’s threat to discount its crude and raise production prompted the price of Brent crude, the international oil marker, to fall to as low as $31.02 per barrel. West Texas Intermediate, the US benchmark, fell to $27.71 a barrel. But why did the world’s top exporter decide to move so aggressively, with demand reeling from the coronavirus crisis? And what does it mean for the wider oil industry?
Why is Saudi Arabia launching a price war?
Saudi Arabia had wanted to lead Opec and Russia in making deeper cuts to oil production to support crude prices in the face of the coronavirus outbreak, which has disrupted global economic activity. But when Russia baulked at the plan, the Gulf kingdom turned on an ally it had worked with to prop up the oil market since 2016. Riyadh responded by raising production and offering its crude at steep discounts. Analysts said that was an attempt to punish Russia for abandoning the so-called Opec+ alliance.
Saudi Arabia may also have wished to cement its position as the world’s top oil exporter, analysts added. The move demonstrated that Riyadh was willing to openly take on Russia and other higher cost producers. “There was a consensus among Opec [to cut production]. Russia objected and has said that from April 1 everyone can produce whatever they like. So the kingdom too is exercising its right,” said one person familiar with Saudi oil policy.
Analysts have questioned the wisdom of Saudi Arabia’s approach. Its economy is not immune to a price crash, even if it believes it can win market share from its rivals.