Chart of the Month | A Price War Erupts in the Oil Market

March 16, 2020 |
1 minute read
|

Oil prices declined over 21 percent on March 9, 2020, the largest single-day decline since January 1991 during the Gulf War[1]. There was optimism prior to the OPEC (Organization of Petroleum Exporting Countries) meeting in Vienna on March 5 – 6 that Russia and Saudi Arabia would agree on supply cuts in response to the coronavirus-driven reduction in oil demand. This quickly disappeared as Russia refused to agree to the supply cuts. On March 7, Saudi Arabia responded by announcing a large output hike, beginning an all-out price war. For the last four years, OPEC and Russia, referred to as OPEC+, have been maintaining oil price stability by keeping production unchanged, allowing shale producers in the U.S. to benefit by increasing output from 9.0 MB/d to 13.0 MB/d. The recent price moves will create significant headwinds for U.S. producers, as many are already operating with negative cashflows and may be forced to shut down wells. As a result, high yield credit spreads have blown out – approaching levels last seen in 2016.

Chart of the Month | A Price War Erupts in the Oil Market

[1] As measured by the price of West Texas Intermediate (WTI) crude oil.

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