What’s Going On Here?

The oil price suffered its biggest drop in almost 30 years, after Saudi Arabia unexpectedly flooded the market!

What Does This Mean?

Oil is caught in the middle of two at-odds countries right now.

• On one side, there’s Saudi Arabia – the biggest producer of the OPEC.
• And on the other, Russia – the de facto leader of ten non-OPEC nations that have nonetheless cooperated with the group to control prices for the past three years.

Combined, the two groups produce about 55% of the global oil supply.

But Russia – eyeing a chance to hurt US shale producers – rejected an OPEC plan to cut production, which prompted Saudi Arabia to open the pumps in retaliation. Monday’s historic drop to a four-year low is exactly what happens when a market battling with coronavirus-curbed demand suddenly hits an unexpected surge in supply.

Why Should I Care?

For markets: Where do we start?

This oil price shock will reverberate for months.

• Shares of oil majors like BP and Exxon Mobil tumbled on the news;
• Bonds of already-vulnerable US shale producers soon followed.
• And that’s to say nothing of the impact on the oil-producing countries themselves.

Only major importers – China among them – might breathe a sigh of relief following the flash sale.

As for the economy as a whole:

• cheap oil might help kickstart global growth in the longer term
• but it also creates another headache for central banks trying to insulate their countries from dreaded deflation.

The bigger picture: Environmental collateral damage.

There’s one other potential loser: the planet.

• After all, why buy a new Tesla when you could drive 30% further per dollar in your geriatric gas-guzzler?
• With the oil price near $30 a barrel, it’ll be harder and harder for businesses to justify investments in renewable energy too…

Content source: Finimize (2020) Feeling Faint. Available from: https://www.finimize.com/wp/news/feeling-faint/ [Accessed 10 March, 2020]