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Why are oil prices crashing?
Why is it in the news?
- The price of a barrel of Brent crude closed down at around $33 a barrel.
- Oil prices saw their biggest single-day crash in almost 30 years on March 9, throwing global equity markets into turmoil.
- Prices crashed by almost 50% this year, from $66 a barrel on December 31, 2019 to the current levels.
More in the news
- Prices crashed primarily on account lack of demand.
- OPEC-Plus alliance:
(1) After 2014 “glut” diplomacy which brought down prices below $30 a barrel, Saudi Arabia and Russia came together to cut output and steady prices.
(2) Known as the “OPEC Plus” arrangement (Russia is not a member of the Organisation of Petroleum Exporting Countries, or OPEC), this alliance kept production lower and pumped up the prices.
(3) The OPEC-Plus cooperation collapsed last week after Russia rejected a Saudi request to effect more cuts in output given the fall in demand owing to the economic impact of the coronavirus outbreak.
(4) The existing output reduction deal is set to expire later this month. The Russian and Saudi sides have said they are no longer constrained by the deal.
- Aftermath:
(1) Saudi Arabia’s oil giant Aramco announced that it would increase output from 9.7 million barrels a day now to 12.3 million barrels in April.
(2) Aramco also offered a discount to its variety of crude, targeting Russian markets in Asia and Europe.
(3) The fear of glut at a time of slowing demand (supply and demand shock) rattled the markets, crashing prices.
- Saudi's likely plan:
(1) As it was clear that Russia was not ready to cut its output further, the Saudis moved to the attack mode.
(2) The plan is to flood the markets with Saudi oil and depress the prices, which would hurt all oil exporters.
(3) Riyadh may have multiple targets. One is to exert pressure on Russia and make it come back to the negotiation table.
(4) And if both sides agree to a new deal, they can reverse the decision to ramp up production and collectively take steps to pump up prices.
(5) Second, if the Russians do not blink, the plan is to capture market share from Russia with discounts.
Source
The Hindu.