By Pam Martens: March 9, 2020 ~
In early afternoon trading, West Texas Intermediate, the domestic crude oil in the U.S., had lost over 20 percent on the day, 39 percent in the last 18 calendar days and 48 percent from its peak this year. The panic selling resulted from a failed OPEC meeting with its allies last week when Russia refused to go along with crude oil production cuts proposed by OPEC to shore up the price of crude. Following the failed meeting, Saudi Arabia began to dramatically discount its oil prices to customers to grab market share. It reminded me of an earlier Saudi oil price war in 1986 – without the coronavirus to add to the panic.
In 1986 I was working at Shearson with newly acquired stock and commodity licenses. I had the good fortune of sitting next to a very savvy female oil trader who had one phone in one ear to the NYMEX (then called the New York Merc) and another phone in the other ear to her oil client.
The Saudi oil minister that year was Sheik Ahmed Zaki Yamani – a non royal who had been bestowed with the title Sheik. Yamani had served as oil minister since 1962. It was his job to keep OPEC oil producers in line. But in 1986, cheating on production was running wild. In an effort to boost global oil prices, Saudi Arabia cut its production below its quota of 4.3 million barrels per day to about half of that in an effort to contain the oil price slide in the midst of a global oil glut.
But fellow OPEC members continued to cheat, leading Saudi Arabia to effectively launch a price war to grab market share for itself, leading to all-out quota cheating among OPEC members. As a result, as the chart above from the St. Louis Fed indicates, West Texas Intermediate crude oil fell by 61 percent in a period of three months.
That outcome was, apparently, not exactly what the Saudi royals had been hoping for. On October 29, 1986, Yamani was unceremoniously fired from his post by Saudi King Faud.
Russia and Saudi Arabia are now engaged in a high stakes game of chicken – with seemingly little regard for whether they set off a global credit crisis among global banks with outstanding loans to deeply indebted energy companies. Or possibly, that’s the desired end game – to drive their oil competitors into bankruptcy and shore up prices that way.