Russia and Saudi Arabia clashed over the oil price, both trying to keep or increase their share in the market. The coronavirus outbreak was at least the official beginning of the conflict. As millions of people are in quarantine, and traveling is reduced to a minimum, oil has faced a sharp decrease in demand. Tensions escalated when Russia decided not to extend the production cut of 1.8 million barrels a day, caused by the stated decrease in demand.
Saudi Arabia promptly reacted by announcing a production boost and offering price discounts. Both actions led to a sharp oil price decrease. Russia did not withdraw here but declared its oil industry can survive the price battle in order to keep the current market share.
What Is The Fight Really About?
The open price war between Saudi Arabia and Russia strongly hit the U.S. oil industry. WTI dropped to $31.13 per barrel, which is a decrease for $10.15 or 24.59%. International benchmark Brent crude had a similar fate. It settled at $34.36 per barrel, which is a decrease for $10.91 or 24.1%. Since there are not many options that the open price war could cause, analysts and experts are thinking that Russia is targeting the U.S. shale companies. And that is not all.
This might be an opportunity for Russia to fight back against the sanctions passed by the U.S. Among other segments, sanctions were aiming to stop Russia in completing its Nord Stream 2 pipeline. This pipeline is supposed to transport natural gas from Russia to Europe across the Baltic Sea. Many oil companies' stock was hit once the tensions escalated, like Exxon Mobile (NYSE: XOM), Chevron Corporation (NYSE: CVX), PetroChina Company, Royal Dutch Shell (NYSE: RDS-A), BP Oil (NYSE: BP), and others.
Exxon Mobil Corporation
Exxon Mobil had an Investor Day a week ago, where it announced some heavy spending in the following years. Its forecast is to spend $33 billion on capital spending this year, and an additional $35 billion in the following years. Having in mind the oil price collapse, it is a question of how this energy giant will be able to support such aggressive spending.
Chevron Corporation, a $175 billion oil giant, which has one of the lowest dividends among the oil giant group, is the company with an impressive asset portfolio that can ensure good financial margins which can make substantial returns for its shareholders, a secure yield of more than 5.5%.
PetroChina issued the force majeure notice to at least one of its LNG suppliers and its suppliers of piped gas and suspended some liquefied natural gas (LNG) and natural gas imports. This was all characterized as a seasonal plunge in demand increased with the effect of the coronavirus outbreak.
Royal Dutch Shell
Royal Dutch Shell stock crashed around 18% on Monday. This was quite a hit for this well-known, blue-chip FTSE 100 company, all because of the oil price plunge caused by the Russian and Saudi Arabian open price war. On the other hand, this might be a nice buying opportunity.
As investors started ditching the energy stocks, after the oil continued to drop, BP has lost almost £20 billion of its value on Monday. BP Oil and Royal Dutch Shell pulled the FTSE 100 to one-day losses, which was not seen since the 2008 global financial crisis.
This open price could result in another 10% decline, or even lead to detrimental losses. This will be a big additional hit to the U.S. oil sector, as companies are already facing tough decisions like cutbacks, forced mergers, and even some bankruptcies. And let's not forget that we're talking about a non-renewable source so its future is anything but guaranteed.
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