Crude oil prices plummeted on Monday after Saudi Arabia launched a bitter price war tactic against Russia after the two oil superpowers failed to agree on production cuts. Oil prices plunged nearly 30 percent on Monday, the most since 1991, as Riyadh offered deep discounts and pledged to ramp up production. The move rattled the oil markets already reeling from the coronavirus outbreak that had caused severe demand-side pressure on crude.

What is Saudi Arabia-Russia price war?

Will oil price stay higher after Opec-Russia output reduction?
Opec flag outside cartel's headquarters Reuters

The chain of events that started late last week is similar to the 2014 oil price war between Saudi Arabia, Russia and the US, when the three large producers competed for market share, driving crude prices down for a continued period of time. Top exporter Saudi Arabia has been campaigning for additional production cuts as a means to prop up prices falling amid a global demand decline. On Thursday, Riyadh proposed additional production cuts of 1.5 million barrels per day from the beginning of April. However, Russia, which is not a member of the Organization of the Petroleum Exporting Countries (OPEC), rejected proposal for additional output cuts.

Saudi reaction

Angered Riyadh announced measures to punish Russia, for which oil market share is crucial. Russia is the world's second-largest producer. Riyadh reduced its forward crude price by a whopping $6 to $7 per barrel, and backed it up with a promise to boost output further by 2 million barrels per day. Brent crude futures fell by $14.25 on Monday to $31.02 a barrel. The 31.5 percent fall was the biggest percentage drop since January 1991, when the first Gulf War started. The US West Texas Intermediate (WTI) crude plunged as much as $11.28 after the Saudi move to $30 a barrel. The 27.4 percent fall was the sharpest drop since January 1991 landmark.

Saudi Arabia Russia agree to freeze oil output levels
Saudi Arabia's then Oil Minister Ali al-Naimi (C) speaks to the media following a meeting with oil ministers of Qatar, Russia and Venezuela. File photo from 2016.

What's oil price outlook?

"The prognosis for the oil market is even more dire than in November 2014, when such a price war last started, as it comes to a head with the significant collapse in oil demand due to the coronavirus," Goldman Sachs analyst Damien Courvalin said on Sunday, according to CNBC.

Analysts had already predicted a drastic fall in oil demand in 2020. While Morgan Stanley has predicted China will have zero demand growth in 2020, Goldman Sachs has said there will be 150,000 barrels per day contraction of global demand this year on account of the economic slowdown caused by the coronavirus outbreak.

How far will oil fall?

Coronavirus status as of 8 March, 2020
Coronavirus status as of 8 March, 2020 GISAID

The dramatic oil market shakeup caused by the Saudi move has given rise to fears of a great oil glut and a sharp fall in prices to as much as $20. ″$20 oil in 2020 is coming," prominent oil analyst Ali Khedery wrote on Twitter. "Huge geopolitical implications. Timely stimulus for net consumers. Catastrophic for failed/failing petro-kleptocracies Iraq, Iran, etc - may prove existential 1-2 punch when paired with COVID19," said the analyst.