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Oil a ‘bigger problem for markets than the coronavirus’ after OPEC deal collapse

A derek pumps in an oil field in Kuwait near the Saudi Arabian border.

Joe Raedle | Getty Images

Oil prices plunged last week as OPEC and its allies failed to reach an agreement on production cuts, and as prices look set to continue cratering, some are warning about the impact on the broader economy.

“Crude has become a bigger problem for markets than the coronavirus,” Adam Crisafulli, founder of Vital Knowledge, said Sunday. “It will be virtually impossible for the [S&P 500] to sustainably bounce if Brent continues to crater,” he added.

Crisafulli noted that oil is “critical” to the U.S. economy. Many people are employed by the industry, and highly leveraged oil and gas companies are key to the fixed income market.

“The sector is like the ‘FANG’ of credit, esp. high yield, given the enormous amount of debt it has outstanding,” he said.

Oil prices have been suppressed since the coronavirus outbreak stoked fears about a slowdown in demand for crude. U.S. West Texas Intermediate crude has dropped 32% this year, while international benchmark Brent crude is down 31%. 

Many on the Street expected OPEC to step in with deeper production cuts in an effort to prop up prices. But after talks collapsed Friday — OPEC ally Russia refused to agree to the proposed additional output reductions of 1.5 million barrels per day —  there could now also be issues on the supply side.

The 14-member cartel and its allies, known as OPEC+, also failed to reach an agreement on extending the current production cuts. This means that on April 1, when the current agreement expires, each nation effectively has free rein over how much crude it pumps.

On Saturday Saudi Arabia announced massive discounts to its official selling prices for April, and the nation could theoretically pump up to its capacity of 12.5 million barrels per day. 

“As from 1 April we are starting to work without minding the quotas or reductions which were in place earlier,” Russian Energy Minister Alexander Novak told reporters Friday at the OPEC+ meeting in Vienna, before adding, “but this does not mean that each country would not monitor and analyze market developments.” 

On Friday, U.S. West Texas Intermediate slid 10.07% — its worst day since November 2014 — to settle at a more than three-year low of $41.28 per barrel. International benchmark Brent crude sank 9.44% to settle at $45.27 per barrel, its lowest since June 2017. 

Both WTI and Brent are currently in bear market territory — down 38% and 40%, respectively, from recent highs — and analysts say prices still have further to fall.

Morgan Stanley forecasts Brent falling to $35 per barrel in the second quarter, with WTI trading as low as $30 per barrel. The firm’s prior forecast had Brent at $57.50 and WTI at $52.50.

Some are even more bearish. 

″$20 oil in 2020 is coming,” Ali Khedery, formerly Exxon’s senior Middle East advisor and now CEO of U.S.-based strategy firm Dragoman Ventures, wrote Sunday 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.”

That said, Crisafulli contended that a price war this time around “shouldn’t be as bleak as 2015” when Brent prices collapsed to $28 in January 2016, since this time around Saudi Arabia “isn’t the aggressor,” and also because the kingdom “can’t tolerate an oil depression.”

“The country’s fiscal breakeven oil prices remain very high, Saudi Aramco is now a public company, and MBS’s grip on power isn’t yet absolute,” he said. “As a result, the gov’t won’t be so cavalier in sending oil back into the $30s (or even lower).”

— CNBC’s Michael Bloom and Natasha Turak contributed reporting. 

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