The oil price collapses completely this morning! Nobody could have predicted yesterday how bad it would get. But that it would be bad was clear. The WTI oil price was quoted at just under 30 Dollars this morning, whereas the price at this morning’s low was already 27.46 Dollars. And that with a closing price Friday evening of $41.50. The picture is comparable to the Brent oil, where the price fell over the weekend from 45 to now 33.29 Dollars. A catastrophe for all traders who, after the extreme fall in oil prices in recent weeks, had recently bet on prices finally rising again (as recently as January, WTI oil was still at 65 Dollars). This will break up many hedge funds! But what happened?
Oil price collapses due to Saudi action!
We already reported in detail about the events of the weekend. Last week Russia refused to reduce the oil production together with OPEC. The oil price had already fallen in the days before because of this threatening scenario. Due to the Russian refusal, the entire OPEC cutback deal was invalidated. Where we actually thought that Saudi Arabia could single-handedly take more production from the market, the exact opposite happened over the weekend.
Saudi Arabia is apparently flooding the market with additional oil (from 9.7 to perhaps 11 or 12 million barrels per day). From April onwards, this will noticeably lower end customer prices! With this, they turn around and try to sweep competitors like the Fracker in the USA from the market with a kind of brutal action. Because the Frackers have much higher production costs, and with low oil prices they might leave the market. The Saudis had already attempted something similar in 2014, but without success. Will it work this time?
The effects will be horrible!
The following chart shows WTI oil since May 2019. Currently, the lowest level since 2016 is being reached, where the oil price had reached a low after a long downward phase of over 100 Dollars in the high. What is so bad about a sharp drop in oil prices, you might ask in Europe? Because yes, at first glance we are the winners, because for consumers and companies, fuels become significantly cheaper! But the entire oil industry is getting into serious trouble. The fracking industry in the USA employs millions of people and pays good salaries. It is possible that many of these companies will soon go bankrupt. The production costs will now be significantly higher than the price of oil. It is hard to imagine that the capital market and banks will continue to supply the frackers with cash at full pelt? Or will a miracle happen like six years ago, when the Saudis tried to do the same?
But in addition to the frackers, the national budgets of OPEC countries will also be brutally affected. Venezuela, Saudi Arabia, UAE and whatever they’re called (even Russia will be affected). There, the state coffers live off the oil revenues. Such a dramatic drop in oil prices pulverizes the revenues and these countries will probably have to cut back many benefits for their citizens, increase taxes, etc. And this, where there are already severe problems in many countries in the region. Just look at Iran, Iraq and so on. The unstable situation in many of these countries is likely to worsen. The theoretical hope could only be that Russia, where there will be much less income from oil, will come back to the negotiating table of OPEC.