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Saudi Arabia's Million-Barrel Plan to Stop Crude Oil's Price Slide

By Jason Hall - Feb 28, 2020 at 4:58PM

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Prices are tumbling due to coronavirus-fueled fears.

This has been an absolutely brutal couple of weeks for oil markets. Crude oil futures have fallen every trading day for more than a week. If Friday's sell-off continues -- Brent crude futures were down 3.3% in afternoon trading -- oil will have fallen 15% in only eight days. Prices are now on course to fall below $50 per barrel for the first time since 2017. 

The ongoing bearishness in the crude market has been fueled by the international spread of the COVID-19 coronavirus. Energy industry experts now expect global oil demand will fall this quarter as a result. Stock markets are slumping too -- the S&P 500 index and Dow Jones Industrial Average both fell by more than 10% in record time over the past week on increased fears that the global economy is headed for recession. Over the past week, the SPDR S&P Oil & Gas Explorer & Producer ETF (XOP -1.40%) has declined by 19% and is near its all-time low.

Stacks of oil barrels outside an industrial facility.

Image source: Getty Images.

This slackening of demand could hardly have come at a worse time for the oil and gas industry. Oil markets were already in a state of oversupply this year as output from U.S. shale has grown much faster than demand was expected to.

Since Brent crude futures peaked in early January at just under $70 per barrel, they have dropped 26%, and there's substantial risk that they will keep declining, given the current conditions of oversupply and falling demand. 

Saudi Arabia pushes for a big OPEC cut

Saudi Arabia, the world's second-biggest oil producer behind the U.S., has reportedly floated a proposal to stop oil's free fall that it plans to put before its fellow OPEC members at the organization's next meeting. It would ask the group, which controls about 40% of global oil production, to cut its combined output by 1 million barrels per day.

That's more than twice as large as the 400,000 daily barrel cut that was proposed in early February, but the tightening of supply is viewed as a necessity given the fears that demand will crater as more countries take actions to impede the spread of COVID-19. 

This isn't in any sense a novel tactic for OPEC. The consortium's members have agreed to cut output a number of times in recent years to stem oil price declines and reestablish some certainty in the markets. Based on Friday's sell-off, however, fear and uncertainty have the upper hand for now. 

Jason Hall has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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