WASHINGTON –The coronavirus terror was bad enough. But over the weekend, the Saudis effectively launched The Mother of All Crude Oil Price Cuts. This tactic aims at Russia’s refusal to continue, or perhaps increase, oil production cuts in conjunction with OPEC. The immediate result: Due to massive and pent-up selling demand in a market already battered by coronavirus fears, a stock market bloodbath erupted on Wall Street at Monday’s opening bell.
The Dow took a swan dive at the opening bell, losing close to 2000 points in just minutes. The resulting nearly 7% drop in the blinking of an eye doesn’t happen very often. Trading action was so violent that trading in nearly all equities on the exchanges was halted for 15 minutes, until 9:49 a.m. ET. Trading has since resumed, with shares recovering slightly. Unfortunately, however, the stock market bloodbath remains fully underway. The Dow and the S&P 500 are still down over 6%. The NASDAQ fares only slightly better, off 490.04 points at the moment, a loss of 5.71%.
What happened, exactly?
In retaliation for Russia’s refusal to go along with extending and perhaps deepening the current OPEC oil production limits — meant to buoy the already-sinking price of crude — the Saudi government initiated the aforementioned Mother of All Price Cuts.
Once the current “OPEC+” agreement expires on March 31, the Saudis will go flat out, increasing their own oil production to the max. That’s said to be ~12.5 million bbl. per day. This could, overnight, drive the per bbl. price of crude down into the $20-$30 bbl. area. Such a move would slaughter pricing and profitability in entire oil extraction and distribution industry around the globe. Today’s violent selling on Wall Street acts as if this is already a fait accompli. The Saudis appear perfectly willing to lose their collective asses if they can bring Russia and the US to their knees. They simply want to re-establish Saudi dominance in the pricing of crude, just like old times. Hence, today’s epic stock market bloodbath.
Further, the possibility exists that the Saudis also intend to put small US shale producers in a pickle. Not to mention big US oil majors as well. The oil majors can withstand this onslaught indefinitely. But already way overleveraged, the legion of small US independents can’t take a price war of this magnitude for very long before going belly up. Thanks, Saudis.
More details on the Saudis’ dangerous game
The Twin Tylers of ZeroHedge provide considerably more color in predicting Monday’s Wall Street horror show as they watched Asian markets tank from the opening trade.
“In case a global viral pandemic wasn’t enough of a concern, on Saturday Saudi Arabia launched a global oil price war, when Aramco announced unprecedented discounts on Brent shipments to clients around the globe, with Bloomberg later reporting that the OPEC nation was set to flood the world with excess production potentially to as much as a record 12 million barrels a day…
“[This,] in a world where oil demand has cratered due to China’s economy remaining paralyzed due to the pandemic, assures that when Brent reopens for trading tonight it will be in freefall, tumbling into the $30s if not lower…
“[This will occur] as OPEC is no more and every producer now scrambles to undercut everyone else in price, unleashing another deflationary massacre and forcing central banks to pull another market-supporting rabbit out of their hat.
“Until they do, however, traders in the Middle East where markets have already reopened, decided to sell first and ask questions later… [S]tocks cratered ahead of the first official oil price prints, which will come after what was already the biggest one day drop in Brent since 2008 on Friday after news that the OPEC+ alliance had fractured. And now oil will have a Saudi oil price war to deal with, prompting some to speculate that the price oil could drop into the high teens, if not lower.”
A Texas Cage Match in the Arabian desert?
Welcome to the Saudi Desert Kingdom Edition of that old professional wrestling standby, Texas Cage Match. It’s likely that the Saudis made a decision that when it comes to the price of oil, they were finally taking control once again. Perhaps they plan to be the last wrestler standing in the squared circle after every other opponent has been tossed out of the ring.
The problem with this strategy is that it’s risky for the Saudis themselves. The US shale revolution damaged the Saudis’ ability to lead OPEC in setting oil prices, not to mention the profitability of Saudi oil. Yet despite the Kingdom’s current actions, US production is not going away. Worse, having just launched Aramco, their state-controlled oil conglomerate in a gigantic, recent IPO, the Saudis only damage themselves and their new investors by this move, as CNBC observed Monday morning, describing Aramco’s own market bloodbath.
“Aramco shares closed at 28.35 riyals ($7.55), 11.4% below its IPO price. The shares closed 5.5% lower.”
And talk about price cuts in real time… As for the current price of crude itself, West Texas Intermediate crude (WTI) traded as low as $27.34 bbl. this morning before “recovering” to approximately $33.68 bbl. as this column unfolds. Your guess is as good as mine as to where the price will close. Brent crude, the international benchmark, currently stands at $36.46 bbl., not much better than WTI at the moment.
This story changes by the minute
This is a fast-moving and unpredictable story. No one knows where today’s substantial oil price cuts will end up. Or if this is merely a radical negotiating tactic by the Saudis. After all, their current OPEC+ agreement with the Russians doesn’t expire until March 31.
But add the coronavirus terror back in, and the current stock market bloodbath the Saudis started is likely to continue indefinitely, damaging countless investors along the way. So I’ll sign off for now, but promise to have more for you later today when the smoke clears from the battlefield.
If it does.
– Headline image: Given today’s headlines, Wile E. Coyote must have added oil stocks to his portfolio at the wrong time.
(Warner Bros. cartoon image mod. by the author. Fair use for satirical purposes.)