Updated at 10:52 p.m. ET
Oil prices and stock indexes were in freefall Sunday after Saudi Arabia announced a stunning discount in oil prices — of $6 to $8 per barrel — to its customers in Asia, the United States and Europe.
Benchmark Brent crude oil futures dove 30% — the steepest drop since the Gulf War in 1991 — in early trading Sunday night before recovering slightly to a drop of 24%. The benchmark Brent crude oil price fell below $34 per barrel.
The oil price shocks reverberated throughout financial markets. Dow futures dropped more than 1,000 points, S&P 500 futures hit their limits after tumbling 5%, and the key 10-year Treasury note yield fell below 0.5%, a record low.
Saudi Arabia, the world's second-largest producer, this weekend said it will actually boost oil production instead of cutting it to stem falling prices, in a dramatic reversal in policy.
Late last week, Saudi Arabia, the rest of OPEC and Russia failed to agree on production cuts to combat falling prices because of fears that the coronavirus epidemic will halt world economic growth. Oil prices were down more than 30% this year before Sunday's collapse.
U.S. consumers are likely to see lower prices at the gas pump, but American oil producers — who lead the world in output — could be hurt by the oil price slide.
Economies from China to Italy have ground to a halt as quarantines shut down factories and demand for products and services craters.
Saudi Arabia and other OPEC members sought to cut production to shore up oil prices. But the once-powerful cartel can no longer move markets alone. It needs the support of Russia, which is not an OPEC member but has recently been coordinating with the organization.
Yet Russia has resisted calls for production cuts. On Friday, the talks ended in failure. OPEC and its allies announced no new reductions and didn't even commit to extending current cuts.
So, Saudi Arabia is doing an about-face. If it can't get the price back up, it's going to drive the price way down. It's offering to cut the oil price for the U.S. market by $7 per barrel, to Europe by $8 and Asia by $6. Paired with Saudi Arabia's ability to rapidly increase production — flooding the market with cheap crude — those unilateral price cuts will push the price of oil down for everyone.
Low oil prices are bad for Saudi Arabia's budget, and the price of the Saudi oil company Aramco's stock tumbled below its initial public offering price on Sunday. But, because Saudi Arabia's production costs are the lowest in the world, lower prices can hit other producers harder.
Russia seems to be the target of this price war. But as Saudi Arabia tries to grab market share with bargain-basement prices, American oil and gas producers, including the fracking industry, will also feel pain.
And even with ample supply and low production costs, Saudi Arabia is not guaranteed to come out on top in a prolonged face-off with Russia — especially if fears of a pandemic keep planes grounded and cars in driveways no matter how cheap crude oil gets.
"They're cutting prices, they're going to increase production. But it's not clear they're going to have buyers for that oil," says Ellen Wald, an energy markets analyst and the author of Saudi, Inc. "It's entirely possible that they may not have the wherewithal and the will and the toughness to withstand a price war and a production war with Russia."
Still, lower fuel prices will offer some relief to the airline industry, which is feeling the strains of the coronavirus crisis, with travel cancellations leading to flight cuts.
DAVID GREENE, HOST:
Global oil prices are collapsing. This is happening because Saudi Arabia launched a price war against Russia over the weekend after the world's two largest oil exporters failed to reach a deal. In a startling move, the kingdom slashed its export oil prices. This is causing turmoil across the financial markets. And let me bring in NPR's transportation energy correspondent Camila Domonoske. Hi, Camila.
CAMILA DOMONOSKE, BYLINE: Hi.
GREENE: OK. I'm even confusing myself just beginning to explain this, so I'm just going to hand it over to you. Can you help us understand exactly what's happening here because it's really important?
DOMONOSKE: Yeah, so this starts with the coronavirus. So this outbreak occurs, and everyone's trying to stop a pandemic. And what that means is people stop moving around; events get canceled; people avoid traveling on planes; businesses might shut down temporarily. All of these things reduce the demand for fuel. So demand goes down, prices go down and that hurts oil producers like Saudi Arabia.
So for weeks, Saudi Arabia has been doing what you would expect them to do which is trying to push prices back up. Saudi Arabia was talking to all the other countries in OPEC. I mean, this is what OPEC exists for.
DOMONOSKE: It's a cartel of oil producers trying to stabilize prices in times like this. So they tried to strike a deal to cut production across the globe and shore prices up. The problem is that OPEC isn't as powerful as it used to be, and it can't move markets all by itself. It needs some more muscle now. And lately, that's been coming from Russia. Russia is not an OPEC member, but it's been cooperating with OPEC countries on cuts recently.
But this time, despite Saudi Arabia's best efforts, Russia said no. They didn't want to do more cuts. And Saudi Arabia lost that fight. Those talks collapsed late last week. And after they were done, Saudi Arabia said fine. If we can't keep prices up, then we will push them as low as we possibly can.
GREENE: So is this just about being angry at Russia? Like, why would Saudi make this 180-degree turn?
DOMONOSKE: It is definitely partly. I mean, you can look at it as punishment on Russia for walking away or a way of pressuring Russia to come back to the table. This is a tactic that Saudi Arabia has done before. I mean, it's worth emphasizing, low oil prices hurt all oil suppliers including Saudi Arabia. This is very hard on the kingdom's economy.
But the Saudis are making a bet. They have a ton of oil, and they can produce it much more cheaply than anybody else can. So even though they're hurt too in a low-price environment, they think they can outlast some of their rivals, specifically Russia in this case.
GREENE: And there could be real global ramifications from this.
DOMONOSKE: Yes, I mean, it doesn't just hurt Russia. It doesn't just hurt Saudi Arabia. Any country that relies on producing oil, which is a lot of countries, is going to feel the pain from this price war. A lot of American oil and gas producers who - many of whom are already struggling in the current market, they're going to be hurt by this.
And it's had effects already across markets, right? So crude prices plunged 30% which is their biggest drop in decades. This made the stock markets go a little haywire over the weekend. At one point, Dow futures dropped 1,000 points. S&P 500 futures dropped so much that automatic safeguards kicked in, in order to limit trading. Asian markets are down broadly this morning - definitely causing some chaos.
GREENE: And we should say this is such a volatile global economy right now, and oil plays such a big role. So where might this head?
DOMONOSKE: Well, the question is, how low does it go? And how long does it last? I think it's also worth remembering what this is all about which was the coronavirus, right? That reduced demand for oil.
I spoke with oil analyst Ellen Wald, who said this might be an obstacle for Saudi Arabia's plan to claim market share here.
ELLEN WALD: Now they're cutting prices, they're going to increase production but it's not clear they're going to have buyers for that oil.
DOMONOSKE: If you're not traveling because of fears of a pandemic, low prices won't change your mind.
GREENE: NPR's Camila Domonoske. Thanks so much, Camila.
DOMONOSKE: Thank you. Transcript provided by NPR, Copyright NPR.