Saudi Arabia drops oil prices triggering market plummet

Dropping oil prices due to coronoavirus fears were further slashed by Saudi Arabia in a price war with Russia.

In a dramatic move, Saudi Arabia has slashed prices on oil exports to between $6 to $8 per barrel for buyers in the US, Europe and Asia. The kingdom took this action after the two biggest global oil producers, Russia and Saudi Arabia, could not come to a deal on oil prices and production, according to NPR’s Camila Domonoske.

Oil prices were dropping due to the decrease in demand that has come with the reduction in travel since the spread of the coronavirus. Saudi Arabia wanted to bring prices back up by coming to an agreement with oil producing nations to cut production. They could not come to agreeable terms with Russia, and decided to drop their own prices.

While Russia is not part of OPEC, it has been a major player in coordinating with the consortium of Middle Eastern oil producers to set prices on oil exports and production levels. In response to the collapse in talks between Russia and Saudi Arabia, the kingdom dropped prices and increased production. This is a reversal from past practices, and an attempt to push cheap oil into the marketplace.

This deep discount on oil from Saudi Arabia has had an impact on global markets. Prices on crude oil went down 30 percent. The Dow dropped more than 1,000 points over the weekend. The 10-year Treasury note yield dropped to a record low, under .05 percent. S&P 500 futures were down 5 percent. It's not great for Saudi Arabia either, where Aramco's stock is now valued at less than its offering price. But it's worse for other nations, and Russia is the intended target.

A drop of this magnitude hasn’t been seen since the 1991 Gulf War. The most recent Alberta budget estimated oil selling for $57 barrel, but the prices are tumbling. Per Goldman Sachs, they could go as low as $20.

Saudi Arabia can produce oil more cheaply and quickly than other nations, and they are counting on their ability and capacity to see them through this difficulty. While Saudi Arabia has taken this measure in part to hurt Russian oil interests, all oil producing nations have felt the impact of these lower prices. Saudi Arabia will also feel the effects of this price war, but they feel they are best equipped to weather the storm.

Ellen Wald, author of Saudi, Inc. noted that "They're cutting prices, they're going to increase production. But it's not clear they're going to have buyers for that oil. It's entirely possible that they may not have the wherewithal and the will and the toughness to withstand a price war and a production war with Russia."

It is also uncertain how other oil producing nations will deal with the impact of these drastic cuts. Oil and gas producers in the US and Canada will certainly feel the sting of Saudi Arabia's unprecedented decision.

The turmoil in oil prices is due to the coronavirus, which has prohibited movement and travel, and drastically decreased demand. Low prices won’t make a difference to travelers who are staying put out of contagion fears, although gas prices will go down. As factories across the world halt manufacturing, fuel is in less demand.