Oil Market Crumbles As Russia Leaves OPEC+ and Saudi Arabia Responds With Flood of Oil, Causing Global Stock and Crypto Markets To Tumble

March 10, 2020 / by Crypto.IQ

The financial markets are opening with a shriek this week due to the disintegration of OPEC+ after Russia refused to cut its oil production. That was followed by Saudi Arabia’s retaliation by flooding the global oil markets, threatening to destroy all of its competitors including the United States shale industry. Not only have oil prices plummeted, but the stock, bond, and crypto markets are also falling as we will explore in this article.

The problems began on Friday during an OPEC+ meeting, which includes the regular members of the Organization of the Petroleum Exporting Countries (OPEC) cartel in addition to non-OPEC allies, primarily Russia.

Essentially, OPEC needed a global oil production cut in order to stabilize the oil market since oil prices have already been plunging due to Coronavirus induced economic weakness. Russia refused to cut oil production, however, causing the immediate collapse of OPEC+ and opening the door for unlimited oil production after April 1. Oil prices quickly declined as low as $41 before trading ended on Friday.

It seems the reasoning behind Russia’s decision is that the United States has levied sanctions against Russia’s oil company, Rosneft, and the United States is trying to prevent the Nord Stream 2 gas pipeline from being completed. Additionally, Russia is likely seeking concessions from the United States when it comes to China, Iran, and Syria, and Russia is using economic pain as a bargaining chip.

In retaliation for Russia refusing to cut oil production, Saudi Arabia announced that it would produce as much oil as possible. Currently, Saudi Arabia produces 9.7 million barrels of oil per day, but after April 1, that will surge as high as 12 million barrels per day.

Further, Saudi Arabia will be offering deep discounts for its oil, particularly in Europe, in order to cut off Russia’s ability to sell oil. It seems the point of this is to force Russia back to the negotiating table.

Oil prices have already declined as low as $27 due to this, as the market prices in the glut of oil supply in combination with drastically declining oil demand. This pushes the price of oil far below what oil-producing nations need in order to balance their budgets. Among these nations are Iran, Iraq, Russia, and even Saudi Arabia itself.

Indeed, shares of Aramco, which is the Saudi Arabian state-run oil company, have plunged below their IPO price for the first time. Notably, King Salman of Saudi Arabia has simultaneously arrested multiple Crown Princes as well as dozens of other members of the royal family and army officers. This could be seen as a move to consolidate power ahead of a period of possible strife in the country due to plummeting oil prices and resultant economic instability.

Global stock markets have reacted quite negatively to this news, with United States stock futures declining to limit down, which is at -5%. Multiple stock indices in Europe and Asia are declining 5-10%. Further, United States Treasury bond yields are at record lows, with the short term end of the curve only a hairbreadth away from negative rates.

Apparently a situation like this has not been seen since the Great Depression. As discussed in a previous article on Crypto.IQ, oil prices have already been in a sharp decline due to the Coronavirus outbreak. Basically, manufacturing, travel, tourism, work production, and retail sales are all declining, and this decreases the demand for oil.

Now Saudi Arabia is flooding the world with oil, creating a market situation where oil stockpiles are surging while oil demand is declining sharply. It’s comparable to the Great Depression where oil demand was declining due to an economic slowdown, and the Texas Black Giant field simultaneously came online, creating a glut of supply which caused oil prices to crash to pennies.

Although oil prices will not crash to below $1 since there has been tremendous fiat inflation since the Great Depression, oil prices may go below $20 according to some economists.

These extremely low oil prices will ruin the oil industries of pretty much every nation. Even Saudi Arabia will take a big monetary hit. United States shale oil production stands to be the biggest loser since the break-even point for US shale is $40-$90 per barrel.

Essentially, this Saudi-Russia oil shock could completely destroy the US shale industry, and US oil production in general, causing a chain reaction of bankruptcies and job losses across the industry, which will then likely have ripple effects since numerous banks, corporations, and individuals are heavily invested in the US shale industry.

Further, the long-term prospects of US oil production collapsing and not recovering due to this crisis will fundamentally weaken the economy of the United States. This is the reason the US stock market has reason to panic.

The crypto market is being hit hard by this situation as well, with Bitcoin (BTC) declining from $9,200 to $7,800 since the OPEC+ deal fell apart. Practically all major cryptocurrencies are down more than 10%, and the total crypto market cap has shed $40 billion.

Although Bitcoin (BTC) and cryptocurrency are often considered a safe-haven asset, on particularly bad economic days Bitcoin (BTC) and crypto have often declined alongside stocks. Essentially, if selling on the stock market is bad enough, investors sell crypto too, likely in order to cover their losses.

Another thing exacerbating this situation is Bitcoin (BTC) futures liquidations, with BitMEX liquidating $200 million of positions in the past day. Basically, anyone going long on BitMEX just got rekt.

It is possible that Bitcoin (BTC) and crypto will resume behaving like a safe-haven asset after today’s market shock wears off although that remains to be seen. Bitcoin (BTC) is now well below the opening price for the month, and when that happens, usually Bitcoin (BTC) keeps going down for the rest of the month based on an analysis of CME Bitcoin Futures expirations.

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