Oil prices plummeted by more than 30% on Monday, March 9 amid Coronavirus fears. A price war between two of the world’s largest oil producers, Russia and Saudi Arabia, pushed investors, already frightened by the coronavirus outbreak, to liquidate assets. Prices reached lows not seen since the 1991 Gulf War.
How Did the Oil Price War Start?
The price war began on March 6 after Russia refused a Saudi-led OPEC proposal to keep oil prices up by restricting global oil supply. This was part of a nearly three-year OPEC+ agreement to manage global oil supplies.
The global coronavirus outbreak has reduced global oil demand, rendering global oil restriction as one key tool for alleviating this global drop in demand, according to Saudi Arabia.
In response to Russia’s refusal, Saudi Aramco — Saudi Arabia’s state-owned oil company — announced it would increase crude oil production next month to 12.3 million barrels per day, 27% above recent levels. It also reduced the price of its crude oil, by USD 6 to USD 8 per barrel for all oil grades exported globally in an effort to undercut Russia.
‘Huge Disruptive Dynamic’
“The oil price plunge adds a huge disruptive dynamic to markets that are already very fragile,” said Paul O’Connor, multi-asset head at Janus Henderson, a global asset management group.
“We are seeing this week, finally, a full-scale liquidation and signs of capitulation, full-scale panic. We see this in every asset,” O’Connor said.
Matt Smith, Director of Commodity Research at energy research firm, ClipperData, argued that Russian leader Vladimir Putin has taken advantage of the coronavirus pandemic to “cripple the US shale industry”.
With the US oil industry based on a debt system, American firms have also accused Putin of attempting to drown out US shale oil companies that rely on higher prices in a global market of cheaper crude oil. The Russian-Saudi crude oil price war has already led to bankruptcy fears among US shale oil companies.
Not Just the Oil Industry
The coronavirus pandemic has brought with it fears that the global economy has fallen into a recession this quarter. As of March 11, the World Health Organisation has recorded 118,381 confirmed cases of coronavirus, including 4,292 deaths in 114 countries and territories worldwide.
Other industries have also been hit by the virus. American multinational corporation Boeing announced on Wednesday that it was suspending hiring immediately and implementing further measures to preserve its cash. The announcement came in response to the impact the virus has had on the travel industry.
“On top of the work of safely returning the 737 MAX to service and the financial impact of the pause in MAX production, we’re now facing a global economic disruption generated by the COVID-19 coronavirus,” Boeing’s CEO Dave Calhoun and CFO Greg Smith wrote on Wednesday, in a note to employees.
Governments worldwide are presently bracing for an economic blow, because of the virus. In Latin America, a region heavily dependent on Chinese investment, industries are suffering, including Venezuela’s oil industry, Columbia’s flower companies, Chile’s fruit exporters and Mexico’s manufacturing plants.
“We’re facing a scenario that I wouldn’t say is catastrophic, but is very delicate, very difficult,” Ecuadorian President, Lenín Moreno on Tuesday. The country is bracing for further unrest after Moreno announced measures to cut $1.4 billion from the budget this week.
British Chancellor of the Exchequer, Rishi Sunak unveiled a £30 billion GBP emergency stimulus package to tackle the impact of coronavirus: “I want to set out our economic response so that we bring stability and security. The British people may be worried but they are not daunted. Our economy is robust, our public finances our sound, our public services are well prepared,” Sunak said.
‘Supply Chains are Being Disrupted Around the Globe’
“The challenge is that there is likely to be a temporary disruption to our economy on the supply side. Up to a fifth of the working age population could need to be off work at any one time, and business supply chains are being disrupted around the globe,” Sunak said, adding that “This combination of people being unable to work and businesses being unable to access goods will mean that for a period our productive capacity will shrink.”
Elsewhere, Ukraine’s Central Bank, on Tuesday, March 10, sold $250 million from its reserves to prevent its currency, the hryvnia from sliding.
“The current situation on the Ukrainian currency market — both the interbank, and cash — was affected primarily by the psychological factor, which, most likely, will be short-term,” the regulator said in its statement.
As industries continue to suffer the financial consequences of COVID-19, governments worldwide are bracing for short-term economic disruptions. But the humanitarian, economic and social costs of the virus continues to exceed official estimates, prompting fears that the virus could lead to long-term global disruptions.