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ANJILI RAVAL: Oil prices had one of the biggest ever falls on Monday, taking the price of Brent crude to nearly $30 a barrel. Behind this was an effective collapse of an agreement between OPEC and Russia to enact production cuts to support market. Saudi Arabia, OPEC's de facto leader, wanted deeper and more prolonged cuts to counter the effect of the spread of coronavirus on demand. The International Energy Agency said this week, that oil consumption is expected to contract this year for the first time since 2009. Despite this, Russia did not want to team up with OPEC believing the bigger cuts to production would only propel rival US shale producers.
So what happened next? Saudi Arabia started a price. War even as the world requires less oil from global producers, the kingdom said it would put another 2.6 million barrels a day into the oil market. This triggered a tit for tat response from rivals. Russia said it would add more oil into the market and so did the UAE. It's the first time since the 1930s that we're seeing such a severe demand shock now combined with the supply shock.
What now? Oil prices have recovered somewhat but no one knows how bad this is going to get. Major oil companies are preparing for a prolonged period of low prices. Occidental Petroleum in the US cut its dividend to shareholders by almost 90% this week. Energy analysts expect big cuts in capital spending from some of the world's major companies and smaller players as their balance sheets take a hit. Producer countries dependent on oil to fill government coffers are also on alert. The last time there was a price crash in 2014, it was brutal. Again, the oil market is preparing for the worst case scenario.