Over the past few days, the oil price has experienced some of the biggest volatility on record by jumping nearly 7 percent today which comes on the back of Mondays’ tumble which was the biggest in nearly 30 years.
The catalyst for the wild swings is the decision by Saudi Arabia and Russia to engage in a price war which threatens to see the oil price fall even further and especially if they can’t reach a last-minute agreement.
Saudi Arabia is planning to increase oil output next month which is well above 10 million barrels a day it had already committed to as it responds to the collapse of the Opec alliance deal with Russia that included production cuts to help boost the oil price.
To counter the threat from Saudi Arabia, Russia said it will also ramp up production next month which is a double whammy because the International Energy Agency has predicted that oil demand is now expected to contract by 90,000 barrels a day this year.
“Members look now to be preparing for a price war by announcing plans to actually increase output,” said Edward Bell, commodities analyst at Emirates NBD
“The outcome is an astonishing reversal of what appeared to be a pending production cut to compensate for the decline in demand caused by the coronavirus outbreak.” he added.
These actions by the 2 of the world’s biggest oil producers is expected to flow over the world economy as a whole and although it benefits some with cheaper fuel prices, other sectors will be hit hard.
In the past, "the decline in oil prices was a slam dunk positive for the economy. Now it's at best a wash," said Mark Zandi, chief economist for Moody's Analytics.
“While drivers, airlines and other oil users might enjoy big savings from sharply lower prices, across the oil patch there will likely be bankruptcies, loan defaults, job losses, a halt in capital spending and other economic disruptions” he added.