Oil prices plunge 30% on price war fears, sparking global equities fall

Oil prices crashed more than 30% on Monday as Saudi Arabia sparked a price war after talks between Opec and Russia on production cuts collapsed last Friday.

WTI crude plummeted 31.5% to $28.27 a barrel while Brent fell 28.5% to $32.36 on Monday morning before paring back some of the losses. At 1139 GMT both prices were down by a fifth as the economic fallout from the coronavirus continued to reverberate through financial markets.

At one point, Brent was down to near $30 a barrel, suffering its worst daily decline since the 1991 Gulf War - at the start of March it was trading at $70 a barrel. Demand has slumped and the Saudis and Russians were trying to find a way to prop up the price.

The falls also highlighted risks to the highly indebted US shale market, where producers were already under financial pressure before the current sell off, analysts said.

Global sharemarkets plunged on the news, with Japan’s benchmark Topix ending the day 5.6% lower and Australian shares off 6%.

European shares were also hammered, with London's FTSE 100 down more than 8% in early trade as Saudi Arabia threatened to open the taps and increase output while also offering sharp discounts to major customers in an effort to bring the Russians back to the negotiating table..

The yen, seen as a safe haven moved to its highest level against the dollar in three years as it rose to YEN 101.57.

As investors looked for somewhere safe to park their cash, the yield on the two-year gilt went negative for the first time in history, meaning the government is now being paid to lend money. Yields move inversely to prices.

Markets.com analyst Neil Wilson said the dispute between the Saudis and Russia had collapsed the Opec alliance that had underpinned pricing in crude markets for more than three years, "with members free to pump as much as they like from April".

"Saudi Arabia maybe hoped to bully Russia by shocking prices lower like this, but for sure Russia will be happy to watch US shale suffer," he said.

"(Russia President Vladimir) Putin is not one to back down, but he may have to. At present we see no way back for Opec+, but the severity of the drop in crude after months of weakness could force the erstwhile allies back to the table."

Wilson added that the collapse in demand for oil caused by the coronavirus and the failure of the cartel’s ability to control supply was "ultra-bearish for crude" and warned that the US shale industry, facing large debt maturities, would suffer "the worst destruction".

"There is no reason to bid up prices. It’ll take a long time to get back from these levels – this is not a gap that will close easily.

"Moody’s only warned in Feb about a ‘staggering’ $86bn in debt maturities coming due over the next two years that left the US shale market exposed to a high level of bankruptcy risk. US high yield debt markets are going to get utterly trashed today," he said.

Analysts at Rabobank said share prices across the US exploration and production sector "currently sit at or near all-time lows as a result of high debt levels, lack of free cash flow generation and extremely poor investor sentiment with respect to the energy sector".

"The gamble that Russia seems to be taking is that a crash in prices will force many shale producers out of business. In the absence of other options Saudi Arabia, with its low oil production costs, has simply been forced to join in with this strategy. US shale producers are reported to account for more than 11% of the US high-yield bond market, so a struggling sector could have broader ramifications."