Oil Nosedives on Saudi Arabia - Russia Crude War

What’s happening: Oil prices plummeted more than 10% to a three-year low, after a week of high volatility.

What happened: Oil prices have been on the decline due to concerns over the impact of coronavirus on the global economy and are down almost 50% year to date.

News of OPEC+ talks having collapsed and Saudi Arabia starting what seems to be a price war with Russia exerted further pressure on oil prices. Friday also marked the worst day in five years for WTI crude, while Brent crude touched its lowest level in three years.

Why oil prices declined: In a bid to support oil prices, the OPEC (Organization of the Petroleum Exporting Countries) had suggested lowering production by an additional 1.5 million barrels per day starting next month until the yearend. The proposal was dependent on support from non-OPEC members, including Russia. Moscow refused to support the additional cut, saying that the outbreak impact on global demand was too early to calculate. The failure of OPEC and Russia to reach a deal for production cut sent oil prices to the lowest level since 2016.

US WTI (West Texas Intermediate) crude oil dipped to a session low of $41.11 per barrel, before settling 10.07% lower at $41.28 per barrel on Friday. Brent crude plunged 9.4% to settle at $45.27 per barrel.

Why it matters: The existing deal between the OPEC and its allies is scheduled to expire in March. Following this, the OPEC+ countries can pump as much oil as they want in a market that is already facing issues of oversupply. The crude oil demand forecast for 2020 has already been reduced due to coronavirus spreading to other countries.

Triggering what could become a price war, OPEC’s de facto leader Saudi Arabia has announced a reduction in its OSP (official selling price) of every oil grade for April suppliers.

New coronavirus cases are accelerating from outside the Chinese borders. The US has declared a “state of emergency” in eight states. Italy’s total cases reached 7,375, with death toll rising to 366, while total cases in France climbed to 1,126. Mainland China reported 80,735 confirmed cases and a death toll of 3,119.

WTI crude was down 26% to $30.59 per barrel in the Asian trade, marking its worst decline since the Gulf War in 1991.

What to watch: Markets will be watching the Saudi Arabia – Russia crude war very closely as well as for the OPEC’s next move to reduce production. Reports of oil stockpiles from the US Energy Information Administration and American Petroleum Institute will be also in focus this week.

The Japanese markets are in focus today after having hit a six-month low on Friday, following four consecutive weeks of losses.

Context: Japanese stocks started the week on a lower note, following concerns of a price war between Saudi Arabia and Russia after the OPEC deal for further cuts in production was rejected by non-OPEC members. The safe-haven Japanese yen surged versus the US dollar during the Asian session today.

Details: After declining more than 2% on Friday to reach its six-month low, Japan’s Nikkei continued its losing spree on Monday after the country reported weak economic figures. The Japanese economy shrank 1.8% in the fourth quarter, versus the preliminary estimate of a 1.6% decline in GDP. This marked the highest economic contraction since 2009, with the economy shrinking 7.1% on an annualized basis in the quarter. Japan's current account surplus also missed estimates, coming in at ¥612 billion for January, versus market estimates of ¥626 billion.

Among oil stocks, shares of Inpex declined more than 13%, while Japan Petroleum’s shares were down around 12% following news of Saudi Arabia cutting its official selling price for oil. In the auto sector, Honda Motor’s shares were lost around 8%, while Toyota Motor was trading lower by around 6%.

In the currency market, the yen is posting strong gains against the US dollar and was trading in the mid-¥102 range this morning.

Why it matters: The yen is posting strong gains against the US dollar due to its “safe haven” status. With Japan starting the week with disappointing economic data, investors look forward to positive reports from the country in the later sessions.

What to watch: The Economy Watchers Survey for Japan is scheduled for release today and is expected to rise to 44.6 in February, versus a reading of 41.90 in January. The Eco Watchers Survey Outlook for Japan is expected to rise to 45.7 in February, from January’s 41.8.

Other Market: Most European indices closed lower on Friday, with the FTSE 100, German 30 and French 40 down 3.62%, 3.37% and 4.14%, respectively.

Germany’s balance of trade and industrial production, Mexico’s inflation rate, Canada’s housing starts as well as US consumer inflation.