Only a few days ago, Saudi Arabia was pushing for a production cut among its oil-producing allies, including Russia. On Sunday, the kingdom did exactly the opposite and opened the spigots, sending prices down more than 30 per cent, the greatest loss since the start of the 1991 Gulf war.
The sudden reversal shocked the energy, equity and bond markets around the world. Saudi Arabia has in effect declared war on oil powerhouses Russia and the United States. Why the sudden reversal?
The U-turn hammered oil, which was already losing value at a rapid rate as COVID-19 swept across the planet. In early European trading, the price of Brent crude, the international benchmark, fell below US$32 a barrel before recovering somewhat to US$36, down 20 per cent since Friday. In early January, Brent was trading north of US$65.
Oil’s plunge spooked the markets and triggered a global sell-off of energy and stocks and pushed the yield of 10-year U.S. Treasuries to a record low of 0.4 per cent as their prices rallied (yields and prices go in opposite directions).
In London, the FTSE-100 index opened almost 9 per cent down. European indexes were down by almost as much. In Italy, where 16 million people in the northern part of the country are in lockdown, the Milan bourse lost 10 per cent. American natural gas prices fell to a 21-year low and shares of Riyadh-listed Saudi Aramco, the world’s biggest company, dipped below their initial public offering price. Aramco has lost some US$500-billion in value since December, putting its plans for an international listing in jeopardy.