Business

A collapse in the oil price spooks investors already nervous about covid-19. No one knew exactly what deal would emerge from Vienna, but an accord seemed certain. Saudi Arabia and Russia, two of the world’s oil superpowers, had worked together since 2016 to control output and support prices. With oil demand plunging because of the spread of covid-19, the partnership seemed more important than ever to all producers. Members of the Organisation of the Petroleum Exporting Countries (OPEC), of which Saudi Arabia is the undeclared leader, were keen to make a deal with allied oil producers, led by Russia. But on March 6th the meeting broke up without agreement, astonishing analysts and alarming investors.

When Russia refused to slash production, the Saudis promptly launched into a price war, offering discounts to customers and announcing an increase in output from next month. Brent crude, the global benchmark, tumbled in price from almost $50 a barrel on March 5th to below $32 on March 9th. The havoc did not stop there. In Asian trading, Japanese shares fell by almost 6% and futures markets presaged even bigger declines in Europe, where Italy imposed an unprecedented lockdown on its wealthiest region. In America, the S&P 500 was 7% down in early trading, prompting a 15-minute suspension.

Investors flocked to the yen, a haven, and to government bonds. The yield on ten-year American treasuries fell below 0.5% for the first time. America’s Federal Reserve, which made an emergency cut in interest rates less than a week ago, is now expected to lower rates by a further percentage point by its April meeting, according to the futures markets. That would return the central bank to the zero-lower-bound on interest rates, where it was stuck from 2008 to 2015.

The meeting in Vienna of the so-called OPEC+ group was held amid much uncertainty. The full economic impact of covid-19 is still unknown. Traffic and production are picking up in most Chinese provinces, but infections in the rest of the world are multiplying. In a recent survey by Sanford C. Bernstein, a research firm, 55% of investors thought oil demand would fall outright in 2020 for only the third time in the past 35 years. Making price forecasts even trickier, Libyan oil production has plunged because of a blockade but could rise suddenly. As OPEC and its allies gathered to agree on production levels, “they were absolutely shooting in the dark,” says Edward Morse of Citi, a bank.

Their blind cross-fire seems to have only added to the uncertainty and anxiety hanging over the world economy. In principle, extra crude production will help the many countries in the world that import oil, even as it harms producers. But the help tends to be diffuse, the harm more acute. Some oil importers, such as Japan, may not spend their windfall gains in full, whereas many oil producers are already overstretched. Countries like Iran, Libya, and Iraq, which were in turmoil even before the outbreak of covid-19, may become even more desperate. Even Saudi Arabia requires an oil price above $80 to balance its budget, according to the International Monetary Fund.

The pain is not limited to national producers. ExxonMobil, a listed oil giant, has seen nearly $100bn wiped off its value since the start of January. And last year the number of North American oil and gas companies filing for bankruptcy jumped by 50%. As oil prices dive, that figure may soar higher still.

In the most recent OPEC+ accord, in December, members agreed to curb output by 2.1m barrels a day to help offset rising production elsewhere. Such deals have supported the price of crude, but also ceded market share and propped up American shale. In 2018 America surpassed Saudi Arabia to become the world’s biggest oil producer.

Now Saudi Arabia’s strategy for OPEC looks as uncertain as it has in years. Prince Abdulaziz bin Salman became oil minister last year in part to ensure the kingdom’s allies would help support prices. In Vienna he pushed for an aggressive deal, announcing on March 5th that OPEC was seeking to lower output by a further 1.5m barrels a day. Russia balked. Now Saudi Arabia seems to be taking the astonishing step of driving prices downward. The biggest discounts—$8 a barrel—were offered to northwest Europe, to squeeze Russian crude in particular.

OPEC’s secretary-general, Mohammed Barkindo, said on Friday that talks will continue. But Saudi Arabia’s latest moves mark a dramatic escalation.