Market Update: Crude Oil Volatility

 03.17.2020

In most other market environment the price war going on in the global oil market would be headline economic news. Amid the coronavirus crisis, however, it has become a bit of a second page story.

Last Monday Russia and Saudi Arabia added fuel to the market’s fire by launching an all out price war. The Saudis and Russians were in talks to decrease oil production as supply was already above historical averages and the demand for oil is going to decrease as a result of the coronavirus. Those talks collapsed as Russia refused to cooperate with the production cuts proposed by the Saudis. In response, Saudi Arabia launched a price war, announcing it would ramp up production and cut prices to pressure Russia into falling back in line. The kingdom said they are going to produce 12.3 million barrels per day, which is above their maximum sustainable capacity. Russia responded in kind, noting they would increase production to nearly 11.8 million barrels per day. This move has broken OPEC’s cooperation with Russia in recent years to support energy prices by limiting output and has created both a supply and a demand shock to energy markets as two large producers ramp up oil supply in the face of decreasing demand. As a result, oil prices lost about a fifth of their value during the trading session on March 9th. It was the largest single day drop in oil prices since the Gulf War in 1991.

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