Crude oil prices collapsed by up to 30% on Monday morning. During the day, the Brent price stabilized to over 36 USD per barrel, a drop of just under 20% from Friday’s value. Only once, when the 1991 Gulf War broke out, the most important benchmark in the oil market dropped so sharply.

After Black Monday, stock markets are no longer the same. The political partnerships that should continue forever have fallen apart. Governments fear for their future, investors for their capital, workers in the oil sector – for their jobs.

This is the “revenge of the new oil regime”, as described by Jeff Currie, a chief commodity strategist at Goldman Sachs. This revenge brings with it new low crude oil prices – and a significant degree of uncertainty that not only lowers commodity prices but also pushes down exchanges and forces investors to flee to safe havens such as government bonds and gold.

The reason for the unprecedented panic in the markets was two men who could not agree on a deal: Prince Abdulaziz bin Salman Al Saud, Saudi Arabia’s Minister of Energy and a senior member of the royal family, and Alexander Novak, Russia’s Minister of Energy. The two countries have closely coordinated their oil production for three years. Saudi Arabia and Russia have formed a 24-member alliance of oil exporters called OPEC+, which represents about half of the world’s oil production.

OPEC+ offset price weaknesses in the oil market, with the Member States reducing production consistently. This artificially reduced oil supply, global stocks began to decline and the price of oil increased. But for the price increase, OPEC+ had to pay more and more expensive. The exporting countries have transferred market shares of competition beyond the OPEC+ cartel, primarily to the US shale oil industry.

An unprecedented price war

This development has long angered the bosses of Russian oil companies. So Saudi Arabia, which wanted to push a new round of cutbacks at the OPEC+ summit late last week, failed because of Russia’s opposition. On Friday, its energy minister, Alexander Novak, set oil markets to collapse. As of April, “there will be no commitment to reduce production”, he said. His Saudi counterpart has only given an affirmative response to press officials asking them if the kingdom will increase production: “You’ll be surprised!”

Over the weekend, Prince Abdulaziz bin Salman Al Saud donned the call to action. Saudi Arabia started a price war. State-owned oil company Saudi Aramco has launched its oil at a high discount market and also announced that it will expand its oil production seriously. The response from the Russian oil industry came on Monday: Rosneft Group also announced that it would significantly expand production.

The fear of oil flooding is spreading on the market now. At the same time, however, the spread of the coronavirus is weighing on the global economy. It has caused a sharp collapse in the demand for oil, as it has been during the financial crisis. Banks and analysts adjust their price forecasts one after the other. Goldman Sachs analysts write about Curie’s chief strategist: “The price war between OPEC and Russia has started, that’s clear”.

From the point of view of Goldman Sachs analysts, the situation is even more critical than in November 2014, the start of the recent price war launched by Saudi Arabia “because it coincides with a collapse in the demand for oil due to the coronavirus”. Jeff Currie and his team expect oil prices to drop to an average of 30 USD per barrel in the second and third quarters. However, low levels are possible, near the 20 USD per barrel limit.

Dark scenarios

Giovanni Staunovo, chief commodity analyst at UBS, agrees. “Brent’s price will drop to 30 УСД пер barrel in the coming days and weeks”, he says. Oil experts at Raiffeisen Capital Management, also see no end to the sell-off sentiment: “If the Saudis fully develop the faucets (on the extraction tubes), we will see a 20 USD per barrel bottom formation of the Brent variety”.

Against the background of gloomy pricing scenarios, investors also backed out of major oil companies on Monday. European oil giants Shell, BP and Total reported double-digit percentage declines as well as US competition in the face of Exxon and Chevron. Only US companies specializing in shale oil and gas were hit harder: papers like Marathon and Chesepeake collapsed more than 30% on Monday.

How quickly oil prices will recover from Black Monday also depends on the strategy that Saudi Arabia pursues with the price war. Bank of America analysts write: “It’s important to find out if Saudi prices are targeting Russia or the US shale industry. But if the market share war is waged against the US shale oil industry, a longer-term drop in oil prices is likely”.

In any case, Saudi Arabia is well prepared. The kingdom has foreign exchange reserves of more than 500 billion USD, which have recently soared. At the same time, Saudi Aramco, the world’s largest oil company, can survive long with falling oil prices: no other oil producer has as low production costs – 2.80 USD per barrel – as the oil giant, which was partially privatized in December. ExxonMobil, the largest Western privately owned oil producer, has a production price of 16 USD per barrel, and at Rosneft it costs 20 USD.

However, Saudi Arabia, which still generates 85% of its government revenue from oil sales, needs an oil price of 83.60 USD to have a balanced state budget. Russia would also be able to cope at 42 USD per barrel. Both countries are well below the world average debt. However, like many Western competitors, Rosneft has large corporate debt.