Saudi oil price war: Why is oil price drop bad? What does oil price drop mean?

Saudi Arabia and Russia, two of the world’s biggest oil-producing powerhouses, saw tensions heighten over the weekend, sending global markets spiralling. A drop in oil prices can have a cataclysmic impact on the global economy. So why exactly is the oil price drop so bad and what does it actually mean?

Saudi Arabia and Russia triggered a price war over the week amid coronavirus panic which sent the price of crude oil spinning to its fastest fall since 19991.

Saudi Arabia last week suggested participants of the Organization of the Petroleum Exporting Countries (Opec), made up of 15 countries of oil-producing nations excluding Russia, cut their oil production by about 1.5 million barrels a day.

Saudi Arabia, leader of the cartel suggested Russia make the most dramatic cut in oil production of around 500,000 barrels a day.

Undertaking this cut in oil production would keep oil prices higher, which would bring in more revenue for nations in the bloc whose economies are heavily dependent on crude exports.

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The Opec cartel accounts for around 30 percent of global oil production.

Russia relies upon oil and gas sales for approximately one third of its GDP and has been keen to wait until the coronavirus panic quiets down. 

Opec talks broke up without agreement last week, when Russians snubbed the Saudi offer.

The Saudis reacted by shocking markets through slashing export prices by 10 percent over the weekend. 

Asia’s oil consumption has dropped since the start of the coronavirus outbreak. 

Coronavirus cases have skyrocketed in China and South Korea, meaning the countries are no longer consuming as much energy as they did a few months ago. 

China’s refineries for instance, cut their imports of foreign oil by around 20 percent last month.

The drop in demand leads to a fall in the commodity’s price, hurting the supplying countries’ bottom lines and subsequently hitting the global economy.

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Shares around the world had their worst day since the financial crisis with dramatic decreases leading to what has been described as “Black Monday”.

Analysts described the market reaction as “utter carnage”.

Experts have said Saudi Arabia is “flexing its muscles” to protect its position in the oil market.

On Monday, the price of international oil benchmark Brent fell by almost a third in its biggest rop since the Gulf War in 1991.

The price of crude oil recovered slightly to trade at 20 percent lower later, but oil prices have already dropped so dramatically this year with the rise of coronavirus cases internationally.

There is likely to be no reprieve either as demand for fuel is expected to continue to decline.

Oil producers were already facing challenging conditions courtesy of increased competition as new non-Opec producers such as Brazil and Norway increased supply.

The Saudis have subsequently magnified its supply glut, while coronavirus has prompted a fall in demand.

The Saudis are the biggest oil exporter in the world with the cheapest cost of production, but a prolonged battle could put pressure on Saudi Arabia’s finances. 

Ratings agency Fitch estimates the Saudis need a price of $82 a barrel to balance the books.

What does the oil price drop mean for the UK?

The UK is a net importer of oil, which means it imports more than it exports.

Subsequently a drop in the price of oil will mean the firms across the country will likely benefit from cheaper production costs.

Drivers may feel the benefit, with petrol being cheaper, although the bulk of the cost consists of fuel duties and VAT.

A low oil price could provide a modest boost for the economy, which will likely be severely hit by coronavirus in the next few months.

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