On Monday, March 9, trading on the world energy market is accompanied by a record collapse in oil prices. At the very beginning of the day, the fall in the cost of raw materials of the Brent reference brand reached 31% - to $ 31.29 per barrel, and the quotes of the American WTI brand - 33%, to $ 27.4 per barrel. Such data are provided by the ICE exchange.
The observed reduction in oil prices has become the largest since 1991, that is, since the Persian Gulf War. The main reason for the price collapse polled by RT experts called the failure of negotiations on the OPEC + deal.
Recall that back in 2016, OPEC countries and 11 states outside the cartel, including Russia, agreed on a simultaneous reduction in oil production. Fulfillment of the terms of the contract was supposed to restore the balance of supply and demand in order to keep oil prices from significant fluctuations.
However, since the beginning of 2020, energy consumption in the world began to decline sharply against the backdrop of the spread of coronavirus, and oil began to gradually become cheaper. As expected, members of the OPEC + alliance were supposed to further reduce production and thereby stabilize the market situation. Meanwhile, on Friday, March 6, according to the results of the meeting, the parties could not agree on a new reduction in production and decided to completely abandon all obligations taken earlier.
“As for the reduction, probably, taking into account the decision made today from April 1 of this year, none of the countries that are members of OPEC and non-OPEC have any obligations to reduce,” said Russian Energy Minister Alexander Novak.
According to him, now a possible increase in oil production by Russia will depend on the plans of national companies. Moreover, according to Bloomberg, in April Saudi Arabia plans to increase production of raw materials up to 10 million barrels per day, and if necessary up to 12 million. Moreover, Riyadh has already announced record 20-year oil discounts for all their customers.
“We see the return of price wars to the oil market. This caused such a massive collapse of quotations. Depending on the activity of oil exporters in the struggle for the market, as well as the scale of the pressure of the viral factor on the world economy, the oil price may soon drop to $ 20 per barrel, ”said BCA Premier chief analyst Anton Pokatovich.
According to him, in the case of a slowdown in the spread of coronavirus, world oil prices may still return to the level of $ 40-50 per barrel. At the same time, the International Energy Agency (IEA) in its report has already predicted a drop in global oil demand due to infection by 90 thousand barrels per day. According to the organization’s experts, energy consumption will be reduced for the first time since 2009.
At the same time, the collapse of the OPEC + transaction will increase investor uncertainty and put pressure on quotes in the coming months. Anna Bodrova, a senior analyst at IAC Alpari, spoke about this in a conversation with RT.
“The whole point is precisely the uncertainty that has arisen and the lack of agreement among oil producers. The very existence of agreements within OPEC + meant that the countries extracting raw materials are engaged in one thing - control over the balance of supply and demand in the world. But, as history shows, in the world of big money, everyone is for himself. In the next six months, the price of a barrel of Brent will be able to gain a foothold in the range of $ 21-45, ”said Bodrova.
At the same time, a TASS source at OPEC noted that Riyadh did not declare price war on Moscow.
"It is not true. We in Saudi Arabia do not intend to wage any wars with Russia. On the contrary, Russia is still a very important partner for Riyadh and the most important player in the energy market, ”he stressed.
The agency’s interlocutor also added that “all participants in the transaction, especially its largest participants, are responsible for what is happening on the oil market now,” and stressed that the OPEC + mechanism is able to earn money again.
Stock shock
Following the collapse in oil prices, the fall of the global stock market began. As a result of the Asian session, the Shanghai SSE Composite index fell 3.01% (to 2943 points), Hong Kong Hang Seng - by 4.23% (up to 25 040 points), and the Japanese Nikkei - by 5.07% and reached 19 698 points.
Securities fell sharply and in European markets. In the middle of trading, the German DAX index fell 6.71% (to 10 767 points), the English FTSE 100 - 5.95% (up to 6077 points), and the French CAC 40 - 6.63% (up to 4799 points).
The Saudi Arabian Tadawul Stock Exchange Index fell more than 9% at the start of trading. Shares of the world's largest oil company Saudi Aramco went down by as much as 10%.
Note that in Russia, Monday, March 9, is a day off, so trading on the Moscow Exchange is not held. At the same time, the value of the shares of Russian companies on the London Stock Exchange also showed a noticeable decrease. So, in the middle of the day, Rosneft's global depositary receipts became cheaper by 22.45%, Lukoil - by 24.38%, and NOVATEK - by 25.41%.
“The destabilization of prices in the oil market can lead to significant negative effects in the activities of energy companies, whose share in world stock indices is quite high. For many countries, the economic situation depends on the success of oil production, which causes investors' concerns, ”said Anton Pokatovich.
According to analysts, a simultaneous large-scale drop in oil prices and stock quotes may become an additional factor in the slowdown of the global economy. Thus, according to the forecast of the Institute of International Finance (IIF), already in 2020, global GDP growth may slow down from 2.6% to 1%. The value is expected to be the lowest since the 2008 financial crisis.
“The OPEC + alliance clearly and uncompromisingly controlled the extraction of black gold amid falling demand for raw materials. Now we are waiting for an honest market pricing in the oil industry. Such a sharp drop in prices occurs for the first time in modern market history, and this is stress for the global economy, ”Anna Bodrova added.
Currency pressure
The global drop in oil prices provoked a noticeable weakening of the Russian currency. So, on March 9, at the international auction, the dollar exchange rate increased by 9.5% and for the first time since March 2016 exceeded the mark of 75 rubles. The euro exchange rate added 11% and reached 86 rubles. The last time a similar indicator could be observed back in February 2016.
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Against this background, the Central Bank has already announced the cessation of purchases of foreign currency under the budget rule. Such actions of the regulator should support the ruble in the near future.
“The Bank of Russia decided not to purchase foreign currency on the domestic market as part of the implementation of the budget rule mechanism for 30 days. This decision was made in order to increase the predictability of monetary authorities and reduce the volatility of financial markets in the face of significant changes in the global oil market, ”the Central Bank website says.
Recall, according to the budget rule, during the rise in price of hydrocarbons, the Ministry of Finance through the Central Bank buys foreign currency and thereby puts pressure on the ruble. Moreover, in the event of a collapse of the energy market, the ministry ceases operations and pressure on the ruble weakens. As the Central Bank noted, the regulator can also use additional tools to maintain financial stability if necessary.
Moreover, the Ministry of Finance also noted that while maintaining steadily low oil prices, the state is guaranteed to fulfill all budgetary obligations and maintain financial and macroeconomic stability due to the sufficient amount of liquid assets of the National Wealth Fund (NWF).
“As of March 1, 2020, the volume of liquid assets of the National Wealth Fund and funds in the account for accounting for additional oil and gas revenues amounted to more than 10.1 trillion rubles ($ 150.1 billion) or 9.2% of GDP. These funds are enough to cover the shortfall in income from falling oil prices to $ 25-30 per barrel for 6-10 years (taking into account revenues under the damper mechanism), "the Ministry of Finance said in a statement.