Monday’s oil price crash terrified markets that were already worried about the impact of the spread of the Coruna virus on the global economy and oil demand. Brent crude futures, the global oil index, fell 22%, to close at $ 35.45 a barrel, while US oil was trading at $ 33.15 a barrel, a decrease of nearly 20%.
Here’s all you need to know about this drop:
Why oil prices fell?
Saudi Arabia, the world’s largest oil exporter, launched a price war at the weekend. The move came after the collapse of the alliance between OPEC, led by Saudi Arabia and Russia.
The Kingdom and Russia met to form the so-called OPEC + alliance in 2016 after oil prices fell to $ 30 a barrel. Since then, the two main sources have organized supply cuts of 2.1 million barrels per day. The Kingdom of Saudi Arabia wanted to increase this number to 3.6 million barrels until 2020, but Russian President Vladimir Putin, who was concerned about the concession of many to American oil producers, refused to approve the plan, prompting Russian Energy Minister Alexander Novak on Friday, To say that countries can produce as they like starting April 1.
Why did Saudi Arabia launch a price war?
Disagreements over how to manage global oil markets spilled over at a meeting between OPEC and Russia in Vienna on Friday. After Russia said it would abandon the alliance, Saudi Arabia warned that Russia would regret its decision, according to sources attending the meeting to CNN.
Moscow was tired of lowering production to stabilize oil prices, and felt that the policy of controlling supply gave more room for shale oil companies in the United States of America to grow.
America has become the first oil producer in the world, and is expected to pump about 13 million barrels per day in the first quarter of this year.
During the weekend, the Kingdom of Saudi Arabia decided to increase its market share by reducing the prices paid by its preferred customers, ranging from 4 dollars to 7 dollars per barrel. It is also believed that the Kingdom plans to raise its production to more than 10 million barrels per day.
What does Corona Virus have to do with all this?
The Corona virus has greatly affected energy demand worldwide, especially in China, which is today the largest importer of crude oil, consuming about 10 million barrels per day.
Factories have broken down and thousands of flights have been canceled around the world, while the outbreak of the Corona virus, which started in Wuhan, China, has become a global pandemic.
The International Energy Agency said on Monday it expects demand to decline this year for the first time since the economic recession in 2009 that followed the global financial crisis.
Which countries will face the most damage?
There is no doubt that none of the countries will benefit from what happens, as the major oil producing countries will lose huge sums regardless of their market share. Russia claims to be the most isolated in terms of lower prices because its annual budget depends on an average price of about $ 40 a barrel, as US sanctions have forced it to become more efficient.
As for the Gulf countries, they produce oil at the lowest possible cost, compared to about two to six dollars per barrel in Saudi Arabia, Kuwait and the United Arab Emirates. However, due to the large government spending and generous subsidies for citizens, it needs a price ranging between $ 70 a barrel or more to balance its budgets.
Therefore, the most affected countries will be the oil dependent countries that have suffered from years of conflict, uprisings or sanctions, such as Iraq, Iran, Libya and Venezuela.
The United States of America will also be affected, as the shale oil boom has brought economic surprise to some states, and low prices will harm oil companies.
Will there be an impact on consumers?
Major importing countries such as China, India and Germany will benefit from lower energy bills, while consumers in general will benefit from lower oil prices and the resulting drop in gas prices, especially in the United States of America where retail markets interact directly with supply and demand, but taxes The surcharges make up the largest share of gas prices in Europe, so the effect will be less clear.