Why are oil prices crashing?

Why are oil prices crashing?

Saudi Arabia, the world's top exporter, launched a price war over the weekend. The move followed the implosion of an alliance between the OPEC cartel, led by Saudi Arabia, and Russia.

The kingdom and Russia came together to form the so-called OPEC+ alliance in 2016 after oil prices plunged to $30 a barrel. Since then, the two leading exporters have orchestrated supply cuts of 2.1 million barrels per day. Saudi Arabia wanted to increase that number to 3.6 million barrels through 2020 to take account of weaker consumption.

But Russian President Vladimir Putin, worried about ceding too much ground to American oil producers, refused to go along with the plan and his energy minister, Alexander Novak on Friday signaled a fierce battle to come for market share when he said countries could produce as much as they please from April 1.

Why did Saudi launch a price war?

Simmering differences over how best to manage global oil markets spilled into the open at a meeting between OPEC and Russia in Vienna on Friday. After Russia said it was ditching the alliance, Saudi Arabia warned it would live to regret the decision, sources who attended the meeting told CNN Business.

The oil price war follows a rift between Russian President Vladimir Putin and Saudi Arabia's crown prince, Mohammed bin Salman, over how best to balance world energy markets.

The oil price war follows a rift between Russian President Vladimir Putin and Saudi Arabia's crown prince, Mohammed bin Salman, over how best to balance world energy markets.

Moscow had become tired of cutting production to stabilize prices and felt that the policy of supply restraint gave more room for US shale companies to grow. Mikhail Leontiev, a spokesperson for Russian state oil company Rosneft, described the OPEC+ deal as "masochism."

"By yielding our own markets, we remove cheap Arab and Russian oil to clear a place for expensive US shale oil and ensure the effectiveness of its production," he told Russian state media on Sunday.

America has become the number one oil producer in the world and is expected to pump about 13 million barrels a day in the first quarter of this year.

Over the weekend, Saudi Arabia decided to fight for greater market share by slashing the prices its preferred customers pay by between $4-$7 a barrel. The kingdom is also reportedly planning to lift production to over 10 million barrels a day.