A long brewing war between Saudi Arabia and Russia came to a historic head on Monday, with oil prices plummeting past record record lows and West Texas futures into the negatives. To the rest of the world, the plunge may have come as a shock, but bad luck and bad faith negotiations made this path all but inevitable.
After the U.S. ramped up oil production starting in 2014, OPEC member state Saudi Arabia crafted OPEC+, which included an informal alliance with Russia, not an OPEC member, to slash oil production and keep global prices artificially high. Russia agreed to renewed production caps through 2019, keeping oil strong enough that state-owned oil company Saudi Aramco raised more than $25 billion in the world’s largest initial public offering late last year.
But when the coronavirus became a full fledged pandemic, global demand for oil collapsed, leading OPEC to call on informal allies, including Russia, to commit to cutting oil production by another 1.5 million barrels per day through the second quarter of the year. On March 6, Russia refused, and two days later, Saudi Arabia announced shock price cuts, sending oil prices spinning by 10%. West Texas Intermediate, a light crude oil used as a reference point for investors, fell by 20%.
On March 10, Saudi Aramco announced that they would maximize output to capacity, while Russia increased its own production by more than a quarter million barrels per day. Oil prices continued to fall, with President Trump attempting to work behind the scenes to cut a deal between the sparring nations and curtail production. Whether whatever modest deal materialized as a result of Trump’s intervention is debatable. What isn’t is that it proved far too little, too late. At that point, Saudi Aramco had already sent four times its normal amount of exports to the U.S. since February. The world, and specifically, the U.S. simply has too much oil and nowhere to put it now, which brings us to Monday’s market massacre.
The headline of the day focuses on WTI futures contracts, which have gone negative for one simple reason: a crucial storage site in Cushing, Oklahoma is full. That necessitates the price of physical barrels fall into the negatives. Quite simply, if you have an oil supply but nowhere to put it, a contract would essentially pay someone to take the supply of the hands of the owner. WTI futures contracts expire tomorrow, yet refineries don’t have room to take any new supply. And if there’s nowhere to put the oil, that contract becomes less than valueless: the market itself reads it as negative, or when an owner would pay someone else to take the asset off of its hands.
There you have it: a global race to the bottom amid a monumental demand shock cratered WTI prices to their lowest ever in history.
