Benchmark Brent crude oil futures fell 30% in early trading Sunday night before recovering slightly to a drop of 24%. The benchmark Brent crude oil price fell below $34 per barrel.
The fall was sparked by Saudi Arabia’s dual decision to boost production while offering deep discounts to customers in Asia, Europe and the United States.
The drop was the steepest one-day drop since the Gulf War in 1991.
The shock decision by state oil company Aramco over the weekend came in response to Russia’s refusal to join an OPEC plan to cut supplies. Aramco will boost its crude output significantly above 10m barrels per day (bpd) in April, after a previous agreement to limit supplies agreed by OPEC and Russia expires at the end of March.
The new strategy adopted by Riyadh appears to target Russia and US shale oil firms, many of which are known to have high production costs and lose money when crude prices fall below $50 a barrel for more than a few months.
Other OPEC producers, such as Iraq, Kuwait and the United Arab Emirates, are expected to follow Saudi Arabia’s lead with price cuts and increased production from April.
“Today’s price action puts at risk the fiscal health of the vast majority of sovereign producers and budget cuts and increased debt loads are now looming in the event of a prolonged period of low prices,” warned Helima Croft, head of global commodity strategy at RBC Capital Markets.
“For the most politically and economically fragile producer states, the reckoning could be severe.”
Though oil is a declining percentage of African economic activity, many governments remain overly dependent on it for their revenue. In Nigeria, oil accounts for as much as 70 percent of total government revenue (federal, state, and local) and 90 percent of export earnings; in Angola, oil accounts for around 75 percent of total government revenue and 90 percent of export earnings.