In the last publication we asked the question about whether the coronavirus is a black swan. And after the developments of recent weeks, this question must be answered with a clear Yes. Financial markets, after remaining very calm, were totally caught wrong footed and the black swan, on the 9th March, turned into a black Monday. Preceding this, over the weekend, due to a quarrel between OPEC and Russia, Saudi Arabia had even taken the decision to really open the valves on the oil taps, regardless of losses and the falling demand for oil. In the true meaning of the words, both nations were pouring oil onto the fire.
Not only had the stock markets in the Far East, Europe and the USA (in this exact order) collapsed, but also the crude oil market. The oil price losses peaked at 31%, the biggest single day loss since the Gulf war of 1991. Whether this move may work out for Saudi Arabia waits to be seen. But the world should be grateful to Saudi Arabia at this time, as the low oil price, and therefore falling energy prices is a massive global economic stimulus package (at a cost to the Saudi economy and of course to the other oil exporting nations).
This shows, once again, what can easily be forgotten, that Saudi Arabia is the only “swing producer” amongst the oil producing countries. Because of this peculiarity, Saudi Arabia is able to run oil production up or down as it will, and has also an enormous pricing power. This is also with very low production costs in international comparison. Competitors in Russia and the USA, at an oil price of USD 35 per barrel, must really have started to sweat.
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