Oil prices plunged Monday as both Russia and Saudi Arabia stood poised to flood the global market with cheap crude in a price war.
The Gulf kingdom has lowered its official crude prices and is threatening record output. Russia's largest producer, meanwhile, said it will ramp up production next month.
Benchmark U.S. crude tumbled $10.15, or 24.6%, to settle at $31.13 a barrel. Brent crude, the international standard, dropped $10.91, or 24.1%, to $34.36.
The steep price drop caused problems for oil field workers, U.S. shale drillers, investors and members of the Organization of the Petroleum Exporting Countries that rely on oil to make their budgets add up.
Moscow's refusal last week to further cut its oil output shattered a three-year alliance of OPEC, led by the Saudis, and major non-OPEC producers, led by Russia, even as oil producers scrambled to find a way to respond to weakening global demand resulting from the spread of the coronavirus.
Saudi oil ministers, angered by Russia's position, said Sunday that they would increase production and drive down prices, making this oil-price cycle the only one in nearly a century to combine weak demand with a global price war.
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Monday's price drop was the steepest since prices plunged 35% on Jan. 17, 1991, the day the U.S.-led military coalition started Operation Desert Storm to force Iraq to withdraw from Kuwait.
This week's plunge, however, will also benefit consumers who should see markedly lower prices at the pump.
"I consider this as a $1 trillion stimulus to the world economy with a $30 oil price decline," Scott Sheffield, chief executive of Irving, Texas-based Pioneer Natural Resources, one of the biggest independent oil companies, said in an email.
Sheffield said Pioneer is secure but that other companies plying the vast shale in places such as North Dakota, Oklahoma and Texas will face difficulties.
President Donald Trump weighed in on Twitter, noting that lower oil prices were "Good for the consumer, gasoline prices coming down!" The president also tweeted that "Saudi Arabia and Russia are arguing over the price and flow of oil. That, and the Fake News, is the reason for the market drop!"
The price drop could mark the end of a boom that vaulted the U.S. to predominance in world crude production. On Monday, shale producers Diamondback Energy Inc. and Parsley Energy Inc. said they're cutting the number of drill rigs in response the price slump.
The boom-and-bust cycle is as old as the oil industry itself. The current price crash has echoes of 1986, when Saudi Arabia abandoned attempts to prop up a glutted market and pumped at will, sending oil futures plunging by more than half in a matter of months.
The price collapse resonated through the energy industry, from giants such as Exxon Mobil Corp., which saw its stock drop the most in 11 years, to smaller shale drillers in West Texas. Shares of Hess Corp., Occidental Petroleum, and Chevron Corp. all suffered double-digit losses. Shares of El Dorado-based Murphy Oil Corp. fell 42.5%.
"There will be almost no place to hide," Stewart Glickman, energy analyst at CFRA Research, said in a note.
Oil demand will decline for the first time since 2009, the International Energy Agency said Monday, revising its earlier forecasts. The agency said that global demand will shrink by 2.5 million barrels a day in the first quarter of the year.
"This is the first time since 1930 and '31 that a massive negative demand shock has coincided with a supply shock," Robert McNally, president and founder of the Rapidan Energy Group, said in an email.
Hurt worst by the crash in prices will be the U.S. shale fields, where costs are substantially higher than the giant reservoirs of Saudi Arabia and Russia.
The higher costs and the short lives of shale wells -- usually 18 to 24 months -- make the U.S. oil fields more sensitive to lower prices. Pioneer's Sheffield said he expects U.S. shale production to start declining in the third quarter of this year and to fall by more than 1 million barrels a day in 2021.
The number of wells operating onshore in the United States is already down 25% from a year ago, according to oil field services company Baker Hughes.
"The U.S.' net exporter days may be numbered," said Cailin Birch, a global economist at the Economist Intelligence Unit in London.
For four of the past six weeks, the U.S. has shipped out more crude and refined products than it's brought in -- but that margin is relatively thin.
"No question U.S. shale producers will experience collateral damage in this price war between Russia and Saudi Arabia," McNally said. "They were already under enormous pressure, and supply growth was set to taper off sharply by the end of the year."
This isn't the first time Saudi Arabia has sought to punish other oil-exporting countries for expecting the kingdom to act as the sole swing producer, cutting its own output while other exporters benefit. With its actions in the 1980s, Saudi Arabia drove down prices to less than $10 a barrel.
"From time to time a price bust serves to instill discipline and remind producers of the importance of collective supply management," McNally said. "Since the early 1980s episode, when Saudi Arabia's production fell to 2 million barrels a day, the kingdom is unwilling to be the sole swing producer, especially when huge cuts are needed." Saudi production capacity is about 12 million barrels a day.
Saudi Arabia kept production relatively high from 2014 to 2016, when prices fell to $26 a barrel. "Apparently, Moscow needs a reminder," McNally said.
Oil-exporting countries had agreed to production cuts of 2.1 million barrels a day that were due to expire at the end of March. At an OPEC meeting last week, those cuts were extended through the end of the year. But OPEC also proposed an additional 1.5 million barrels a day of reductions, with non-OPEC countries providing half a million barrels a day in cuts. Russia declined.
Russia's state oil company Rosneft said it is planning to lift oil production and could start ramping up output on April 1, adding 300,000 barrels a day within weeks of that date.
Russian Energy Minister Alexander Novak said the current state of global oil markets is within Moscow's forecast range, noting it will make efforts to ensure the nation's oil sector remains competitive, according to a statement on the government website.
"The new price war is between Saudi and Russia. It is not about shale," said Pavel Molchanov, senior energy analyst at the investment firm Raymond James. "They pretended to be allies for three years, and now the pretense is over."
Information for this article was contributed by Steven Mufson and Will Englund of The Washington Post and by Dan Murtaugh, Alex Longley, Jackie Davalos, Joe Carroll, Rachel Adams-Heard, David Wethe, Kevin Crowley and Sheela Tobben of Bloomberg News.
A Section on 03/10/2020