After Russia declined Friday to participate in an OPEC price-boosting oil production cut, Saudi Arabia announced Saturday night that it's slashing oil export prices by nearly 10 percent and ramping up production. When markets opened Sunday night, New York time, things got ugly quick.
Demand for oil was already falling amid the global coronavirus outbreak. And as the market took stock of the Russian-Saudi price war, crude oil futures fell more than 20 percent, the biggest one-day tumble since a record plunge in 1991 at the start of the Gulf War. U.S. stock futures fell the maximum allowed 5 percent, and trading was halted on futures tied to the S&P 500 for the first time since President Trump's election.
This crash in oil prices will be almost certainly make gas cheaper, which is good news for drivers, but "economically, this could get very bad for Texas and North Dakota," writes oil historian Gregory Brew. Saudi Arabia's price cut and production boost are "essentially a declaration of war on U.S. producers," especially the shale drillers who've made the U.S. a major oil exporter. "Back in 2014, Saudi Arabia's campaign to crush shale eventually backfired," leaving the U.S. with greater market share, Spencer Jakab explains at The Wall Street Journal, adding:
This time, though, U.S. producers can't squeeze similar efficiency gains out of the shale patch and Wall Street is unlikely to step in with a wave of fresh capital as quickly — particularly since petroleum demand is in the process of suffering a collapse sharper than during the global financial crisis. It will be bad. But it will be worse for OPEC, and for Saudi Arabia in particular. [Spencer Jakab, The Wall Street Journal]
It will be worse for Iran and Venezuela — Russian allies — as well. So why would Moscow do this? "If you are Russia, it's worth it for you to take a three-month price hit to see if you can knock out U.S. oil exports," Amy Myers Jaffe, an oil and Middle East expert at the Council on Foreign Relations, tells The New York Times. U.S. producers will hurt, but "shale isn't gone for good," Jakab predicts. "OPEC's power may be."