The oil market meltdown and its worldwide impact

Clash between oil titans comes as coronavirus squeezes economies.

FRANKFURT, GERMANY — A clash of two oil titans — Saudi Arabia and Russia — is sending shock waves through energy markets, with wide-ranging implications for consumers and oil companies, including those in the No. 1 producing country, the United States.

The spat comes at a critical moment; the coronavirus outbreak is squeezing economies and world oil demand is forecast to shrink in 2020 for the first time since 2009. Oil prices fell Monday by the most in one day since the 1991 Gulf War. The price of U.S. crude fell as much as 34% to $27.34 a barrel, a stunning drop for one day and the lowest price since early 2016.

The decline followed Russia’s refusal last week to join the OPEC oil cartel in proposed production cuts. Thwarted in its search for cuts, Saudi Arabia, the leading OPEC member, changed course by cutting prices and signaling it will increase production. Saudi Arabia’s state-owned company pledged Tuesday to supply a record 12.3 million barrels a day next month, a production level 25% higher than last month. The supply hike puts Aramco above its maximum sustainable capacity, indicating the kingdom is tapping strategic inventories to quickly dump as much crude on the market as possible.

Moscow responded within minutes, with Energy Minister Alexander Novak saying Russia had the ability to boost production by 500,000 barrels a day. That would put the country’s output potentially at 11.8 million barrels a day — also a record. Other OPEC members followed, with Iraq saying it would increase shipments by as much as 350,000 barrels a day and Nigeria adding about 100,000 more. Here’s a look at what the oil price war could mean in the industry and for consumers:

Q: Why are prices falling?

A: First came the coronavirus outbreak, which reduced travel and transport, sharply reducing demand for fuel. Then came last week’s meeting between OPEC and non-member countries. On the agenda: a production cut of 1.5 million barrels a day, about 1.5% of global production. The idea was to keep prices from sagging even more as demand falls. Saudi Arabia, the world’s No. 2 oil producer, wanted No. 3 Russia and other nonmembers to take 500,000 barrels per day of the cuts.

Since 2016, the Saudis and Russians have worked together on production issues. But this time Russia refused to join new cuts or to extend previous production cuts that were due to expire. So the Saudis hit back, deciding to ramp up production and slash prices.

Q: What’s the Saudis’ goal?

A: First, protecting market share. Both Saudi Arabia and Russia have seen U.S. producers take a chunk of their market, and falling prices help keep customers on board. Second, Saudi Arabia may hope that the pain of low prices will force a Russian rethink.

Q: What’s behind Russia’s refusal?

A: Russia may have seen no point in cutting production only to lose market share as U.S. shale producers take up the slack. Analysts say Saudi Arabia may be underestimating Russia’s ability to weather low prices. Both countries depend on oil revenues, but Russia says it can balance its budget at around $42 a barrel for its own benchmark crude. Saudi Arabia, whose economy is less diverse, needs more than $80 per barrel, according to the International Monetary Fund.

Russia may also have a longer-term target: the U.S. oil industry. “They’ve decided they’re going to take some short-term pain in order to inflict damage on one of their major competitors,” said Tom Adshead, research director for the Macro-Advisory consulting firm in Moscow.

Q: What does this mean for U.S. producers?

A: Low prices could constrain activity in the American shale oil industry. According to the Federal Reserve Bank of Dallas, $50 per barrel is the price at which it becomes profitable to drill a new well in the U.S. Large producers have already scaled back with prices at $50 a barrel. In Texas, the number of active rigs fell from 553 in October 2018 to 398 in January 2020. Around the same time, the oil industry in Texas shed about 14,000 jobs.

The Washington Post reported Tuesday that the White House is considering federal assistance for oil and natural gas producers hit by plummeting prices.

Q: What’s it mean for U.S. prices at the pump?

A: Lower crude prices should mean lower pump prices, with a lag of about six weeks.

AP 2017 Oil prices fell Monday by the most in one day since the 1991 Gulf War. The price of U.S. crude fell as much as 34% and lower crude prices should mean lower pump prices, with a lag of about six weeks.