Asian markets plunged on the news, with Japanese stocks falling 4 percent after they opened. Australia’s market declined 5 percent at the open. Meanwhile, the yield on the U.S. 10-year treasury momentarily slipped below .5 percent for the first time in history on Sunday night as investors fled for safe havens.
Saudi Arabia had pushed last week for a steep cut in production by OPEC countries and by those oil producers in league with OPEC, particularly Russia. The idea was to prop up prices in the wake of a global decline in demand because of the epidemic of covid-19, the disease caused by the novel coronavirus. But Russia balked, not wanting to give up market share, and over the weekend, the Saudis turned 180 degrees.
They are now moving to flood the market with hundreds of thousands of barrels of additional oil per day and offering steep discounts to refineries around the world.
Analysts fear the move is the beginning of a price war between the Saudis and Russia — which will squeeze American shale oil producers as prices are heading sharply downward.
West Texas Intermediate crude, one of the industry’s price benchmarks, fell 10 percent Friday before the Saudi announcement, closing at $41.28 a barrel. By Sunday evening, it had fallen an additional 25 percent. The last time West Texas Intermediate fell below $40 was in August 2016.
″$20 oil in 2020 is coming,” Ali Khedery, a former U.S. official in Iraq and onetime Middle East expert with Exxon, wrote on Twitter. “Huge geopolitical implications. Timely stimulus for net consumers. Catastrophic for failed/failing petro-kleptocracies Iraq, Iran, etc. — may prove existential 1-2 punch when paired with COVID19.”
In the face of Russian intransigence, the Saudis were unwilling to make unilateral cuts in production. But the problem they face as they enter into a price war is that Russia is better positioned to sustain a stretch of cheap oil.
The Russians believe cutting production would open the door to more American competition, by raising prices and reducing supply, said Mikhail Leontiev, a spokesman for the Russian oil giant Rosneft.
“From the point of view of Russian interests, this deal [to cut production] is simply meaningless,” Leontiev told the Ria Novosti news agency Sunday. “We, yielding our own markets, remove cheap Arab and Russian oil from them in order to clear a place for expensive American shale. And to ensure the efficiency of its production. Our volumes are simply replaced by the volumes of our competitors. This is masochism.”
The Saudi oil company Aramco is offering discounts of between $6 and $8 for delivery in April, it announced late Saturday. Its shares fell below their original IPO price on Sunday for the first time on the Saudi exchange.
A production-cut agreement could still happen. An advisory-level OPEC meeting is scheduled for later this month, and the Russians have said they are open to further talks.