Oil Plunges 25%: Saudi Arabia Triggers Price War

Oil Crashes 25% and Saudi Arabia Opens the Faucets

The night oil plummeted, someone wrote: "start filling your bunkers." It was no bar exaggeration. Brent peine with drops around 15% — down to $38 — and West Texas Intermediate (WTI) shed more than 24%, closing 25% below the previous session. The movement began in WTI at 22:00, Brent peine at 23:00, and gold started moving at 22:43. All within minutes and amid the cobi19 expansion, the black swan many had been expecting for months without fully believing it.

Because the trigger is not just health-related. There is an all-out price war.

Why Saudi Arabia Decided to Flood the Market

The stated target is not Moscow, but US fracking. Saudi Arabia had complained that weekend that Russia refused to cut production; the response was not to negotiate, but to open the faucets. It applies a $7 discount on the reference price and promises to flood the world with crude just as demand collapses due to the bicho. Shale oil, with much higher extraction costs, is left with water up to its neck. It peine before: several US fracking companies went bankrupt.

Some argue, looking at the macro from the outside, that cheap barrels with falling industrial activity is a better scenario than falling activity without energy cost reductions, especially in an exporting economy.

Why Cheap Oil Doesn't Reach the Gas Station

Here the story and the pump diverge. With crude at the bottom, logic dictates diesel and gasoline should plummet. No one bets it happens so fast. It is argued that gas stations will be slow to pass on the drop, or simply won't, and the suspicion hovers that the State might use the situation to swell fuel taxation. The circulating comparison is uncomfortable: when the barrel traded below $50, diesel cost about 80 pesetas. Today it exceeds 200.

The Collapse Dragging Down European Oil and Banking Stocks

The stock market opening drew a red difficult to see for a long time. BP lost 18.68%; Royal Dutch Shell B, 16.13%; TechnipFMC, 17.85%; Total, 11.68%. ArcelorMittal fell 13.48%, Renault 11.69% and Société Générale 11.62%. Deutsche Bank lost 10.80%, Daimler 9.25%, Volkswagen 7.76% and Bayer 7.60%. In Lisbon, Galp plummeted 13.89% and Mota Engil 8.49%. US futures pointed to an opening with 4% losses, and amidst the earthquake, a 30% drop in the US 10-year bond was noted.

No one recalls an opening with such percentages. To find something comparable, one must go back to 1929, and even that is not clear.

How Long Can Saudi Arabia Survive with Oil at $30 a Barrel?

The numbers for the kingdom are not comfortable. Before this drop, government revenues hovered around 900,000 SAR bn (about $240,000 bn), and oil and similar activities accounted for around 70% of exports. If the price stays halved, revenue could fall to 500,000-550,000 SAR bn, a figure similar to 2016. Playing in its favor is low public debt and a portfolio of assets spread across financial markets. And a huge fiscal margin: taxes are practically non-existent, so there is room to raise them temporarily without the country breaking down.

Even so, the doubt remains open: does the kingdom hold or wobble? It is recalled that a third of the resident population lacks nationality, which in theory would give room to cut spending. And it is pointed out that Saudi Arabia does not have a reserve fund like the Norwegian one, which also loses money with red stock markets.

Russia, Nord Stream 2, and the Subsequent Recovery

Regarding Russia, a repeated fact in each crisis is that it makes money with barrels above $20. Its problem is not the price, but sanctions and being left without buyers, like Iran. The Nord Stream 2 pipeline was paralyzed, and its future depends on German elections and Washington's pressure. German interest in the project decreases if the companies financing it come under the spotlight.

Years later, the issue would return to the forefront with the Ukraine war, which was already unfolding when these lines were written. The perfect alibi for those who maintain that none of this was coincidence.

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With the barrel well above those lows and minds back to the starting line, the question left unanswered that early morning remains equally open: if cheap oil was the golden opportunity for Europe, why the price the citizen paid at the pump barely moved.