BREAKING NEWS
This content is not available in your region

What's behind oil price war that sent markets plunging?

Comments
Image: A gas station in Bangkok
An employee wearing a face mask fills up a car at a gas station in Bangkok on Monday.   -   Copyright  Mladen Antonov
Text size Aa Aa

LONDON —The new coronavirus outbreak'sdisruption to the world economy — with fewer planes flying, ships sailing and factories producing — has recently pushed down oil prices.

But now they are plummeting, and bringing world stock prices with them.

What's behind the dramatic price moves, and why is it shaking up world markets? Here NBC News takes a look at how we got here.

An employee wearing a face mask fills up a car at a gas station in Bangkok on Monday.
An employee wearing a face mask fills up a car at a gas station in Bangkok on Monday. Mladen Antonov

The coronavirus effect

With the viral epidemic already limiting economic activity in affected countries and reducing demand for crude oil since late February, members of the OPEC cartel and key ally Russia met last week to discuss by how much each country should reduce output to address the crisis.

"The main reason why coronavirus is a threat to oil prices is that China is the main new consumer of oil in the world," according to Cailin Birch, global economist at the London-based Economist Intelligence Unit, which provides forecasts and advisory services to businesses.

China alone contributes about a third of new consumption of oil each year, and Asia more broadly about 50 percent of new consumption, she added.

If the demand slows down in the region because people aren't travelling or factories aren't producing as a result of coronavirus, oil prices will sink.

An all-out price war

When there has been an imbalance between supply and demand of oil in the past, oil-producing countries have agreed to reduce the supply to shore-up prices, Manouchehr Takin an international oil and energy consultant who previously worked for OPEC explained.

But this time, OPEC — the association of major oil-producing nations —and Russia failed to agree on a way to deal with the price fall caused by the virus.

Analysts told NBC News thatSaudi Arabiahad pushed for even deeper cuts to production, but Russia had disagreed and appeared unwilling to bear the brunt of more cuts.

Birch said among the reasons behind the lack of agreement could be that Saudi Arabia's oil industry is entirely state-run, which means it is more able to make strategic decisions about matching production levels to their desired price. Meanwhile, Russia has powerful private sector interests meaning hits to the price of oil are harder to manage.

"Russia is also less willing to do anything that benefits the U.S. generally, given their poor relations and U.S. efforts to undermine Russia's energy dominance," she said, referring to American attempts to "sink" a Russian gas pipeline project to Europe.

Takin also said one interpretation of why Russia was hesitating to agree to further production cuts was that President Vladimir Putin may wish to squeeze the U.S. oil industry because, since it is led by the private sector, it is not well positioned to cope with falling oil prices.

The lack of agreement Friday has triggered a price war as nations race to capture the market share.

"That is a huge development for the market because the partnership between Saudi and Russia has been the only thing that's been keeping a floor under oil prices," said Birch.

"Now we have weakness on both the supply and the demand side of the scale, there's very little propping them up," she added.

What now?

The oil and gas sector should be very worried, according to analysts.

Many U.S. oil companies have borrowed money to dig for shale oil, and the fall in prices could force them to default on those loans, said Takin.

Additionally, the price war gives extra leverage to national oil companies such as Saudi Aramco, which are better placed to manage with less revenue for several months, he added.

However, falling oil prices mean lower prices at the pump — so consumers will be happy in the short term.

The Associated Press contributed to this report.