Move follows Russian refusal to join Opec-led production cut aimed at keeping prices high
Phillip Inman – The Guardian
Saudi Aramco workers at an onshore rig. Photograph: Saudi Aramco Handout/EPA
The price of crude oil has plunged by more than 20% after Saudi Arabia, the world’s top oil exporter, said it would step up production from next month, flooding global markets and most likely depressing petrol and diesel prices.
Brent crude futures slid 30% to $31.02 a barrel in chaotic trade on Monday morning, before recovering slightly to $36.06, a drop of 20% on Friday night’s close. It was the worst one-day fall for brent since the start of the first Gulf war in 1991. US crude fell 27% to $30.
The safe-haven yen surged against emerging market currencies that have a large exposure to oil, including the Russian rouble and Mexican peso, as analysts saw danger ahead.
“Today’s price action puts at risk the fiscal health of the vast majority of sovereign producers and budget cuts and increased debt loads are now looming in the event of a prolonged period of low prices,” warned Helima Croft, head of global commodity strategy at RBC Capital Markets.
“For the most politically and economically fragile producer states, the reckoning could be severe.”
The shock decision by state oil company Aramco over the weekend came in response to Russia’s refusal to join an Opec plan to cut supplies. Aramco will boost its crude output significantly above 10m barrels per day (bpd) in April, after a previous agreement to limit supplies agreed by Opec and Russia expires at the end of March.
A barrel of Brent crude has been almost halved in price since the start of December when it stood at more than $66. Prices dropped by almost 10% on Friday after news broke that the planned Opec deal had foundered.
On Saturday, Aramco slashed its official selling price for April for all its crude grades to all destinations.
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Higher production and price cuts by Aramco are likely to push world prices down further, hurting countries that rely on oil exports for tax income and foreign exchange, especially in Africa, south-east Asia and South America.
The new strategy adopted by Riyadh appears to target Russia and US shale oil firms, many of which are known to have high production costs and lose money when crude prices fall below $50 a barrel for more than a few months.
Other Opec producers, such as Iraq, Kuwait and the United Arab Emirates, are expected to follow Saudi Arabia’s lead with price cuts and increased production from April.
The Saudi decision came after marathon talks at the Opec headquarters in Vienna, when the Russian energy minister, Alexander Novak, said that from 1 April neither Opec nor non-Opec countries had any restrictions on production.
The sources said April’s production would be significantly higher than 10m bpd, possibly closer to 11m bpd. In the past couple of months, Saudi Arabia has been pumping 9.7m bpd.
Saudi Arabia has an oil output capacity of 12m bpd, giving it the ability to swiftly increase production.