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‘Bigger than coronavirus’: Oil records biggest price drop in 29 years

Lucy Dean
·4-min read
Pictured: Saudi Arabia oil field, red arrows suggesting ASX plunge and coronavirus cells. Images: Getty
Is oil a bigger threat to the global economy than coronavirus? Images: Getty

Global oil prices plummeted 30 per cent within minutes on Monday after Saudi Arabia slashed the official selling price, triggering a price war and an energy sector frenzy.

The struggling energy sector triggered the worst open on the Australian share market since the Global Financial Crisis (GFC) this morning.

The energy sector plunged 17 per cent, falling to levels last seen in 2016 as the ASX also shed more than AU$120 billion, taking it to the lowest level in more than a year.

And by midday, the broader stock market had shed nearly 6 per cent, in its worst start since the GFC.

What’s happening with oil and coronavirus?

“Crude [oil] has become a bigger problem for markets than the coronavirus,” markets commentary service Vital Knowledge founder Adam Crisafulli said on Sunday.

“It will be virtually impossible for the S&P 500 index to sustainably bounce if Brent [crude oil] continues to crater.”

Crisafulli’s words came after oil recorded its largest one-day decline since 2014 on Friday after a deal between Russia and the Organization of the Petroleum Exporting Countries (OPEC) – which includes Iran, Saudi Arabia, Iraq, Indonesia and Venezuela – collapsed.

Oil prices have been under pressure since fears of coronavirus limiting demand, and a deal between OPEC and its allies, including Russia, would have seen the sector cut production across the board to support prices.

But OPEC and its allies, dubbed OPEC+, failed to reach an agreement to extend the production cuts, meaning that as of 1 April, every country will be able to decide just how much oil it produces.

Saudi Arabia responded by announcing it would significantly increase production and cut the price, triggering a potentially massive price war.

Goldman Sachs has warned Brent crude prices could fall as low as US$20 (AU$30.24) a barrel.

Morgan Stanley also forecast Brent tumbling to US$35 a barrel – significantly lower than the previously predicted US$57.50.

American think tank the Atlantic Council said coronavirus, or Covid-19, will effect the global oil trade in two ways: travel restrictions are severely curtailing oil demand and general market movements in response to Covid-19 predict future declines in demand as the global economy slows.

Could petrol prices fall to $1?

gas station
Here's how much prices will fall. Image: Getty

Petrol prices across Australia have been gradually falling for the last few weeks to around $7 a barrel as international demand has plummeted, NRMA spokesperson Peter Khoury told Yahoo Finance.

“In addition to that now, we're now hearing reports of a bit of a production trade war between... OPEC and Russia,” he said.

A trade war between OPEC and Russia generally sees better outcomes for Australian drivers, he added.

Prices will fall across Australia, with today’s massive movements likely to be reflected within seven to 10 days, depending on the part of the country.

“A good example of that is Sydney right now, [where] we’ve gotten to $1.24 on average. We thought that was as good as it was going to get, but we’re waiting to see what happens,” he said.

“Those prices could fall even further. What we do know, as a trend, is that we’re going to start seeing cheaper petrol in Australia.”

He said prices will likely fall another 10c - 12c a litre, although said prices will “probably not” fall to $1 a litre.

“We’re waiting to see what happens between now and Easter, but certainly the averages are going to fall in Sydney.”

These prices will also be interacting with the broader petrol prices cycles, Khoury explained, but general prices will be around 10c cheaper.

“In Sydney with the price cycle, when we go up we will probably go up to $1.52, not $1,62, which is what it was in the last cycle and that's without taking into consideration these latest falls.”

However, CommSec chief economist Craig James said petrol could fall to $1 a litre.

“Provided the Aussie dollar is reasonably stable, motorists may be able to look forward to filling up for near $1 a litre,” James said in a markets report on Monday.

“Filling up the car with petrol is the single biggest weekly purchase for most households. The fall in the oil price works like a de-facto interest rate cut,” he added.

“But arguably the lower petrol price could prove more stimulatory. Many home buyers have responded to recent rate cuts by electing to pay down debt at a faster rate rather than use savings to engage in retail therapy.”

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