Oil is ensnared in such a crisis that Wednesday’s 24% plunge in New York wasn’t even its worst day this month. Futures are now at the lowest level in almost two decades after Saudi Arabia signaled it’s doubling down on a price war with Russia just as demand evaporates. Prices dropped below $25 a barrel for the first time since 2003 in London and tumbled 24% in New York as the kingdom vowed to keep producing at a record high “over the coming months.”
For the last 10 days, Riyadh has issued nearly daily statements raising the stakes in its shock-and-awe battle with Moscow, first announcing massive price discounts and output. The kingdom is now pledging to pump flat out for months to come, and prices are in free fall. Oil is now down over 45% since failed talks between members of the OPEC+ alliance to further cut output and tackle the demand fallout from the virus outbreak.
“What we are seeing here is essentially the atomic bomb equivalent in the oil markets,” said Louise Dickson, an analyst at Rystad Energy A/S. “With each day there seems to be yet another trap door lying beneath oil prices, and we expect to see prices continue to roil until a cost equilibrium is reached and production is shut in.”
Riyadh appears to be embarking on a Darwinian survival-of-the-fittest strategy under which the highest cost producers, including U.S. shale companies and others working Brazil’s offshore fields, will suffer enormously. The Saudi Ministry of Energy “directed Saudi Aramco to continue to supply crude oil at a level of 12.3 million barrels a day over the coming months,” according to a statement.
Russia so far has suggested it’s prepared to absorb the pain, although for the first time on Wednesday the Kremlin said it would prefer higher prices. Yet, few in the oil market see either Moscow or Riyadh taking a u-turn.
Saudi Arabia “wants to keep the pressure high,” said UBS commodity analyst Giovanni Staunovo. “It seems to me they want to trigger so much pain to Russia and the other producers, to eventually have a new production deal at a later stage. That policy might create a lot damage in between.”