The irrationally rational oil price crash that's sinking markets

This isn't a time for OPEC and Russia to be declaring an oil price war when the coronavirus is already creating havoc. But there's a method to the madness.

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It isn't only the coronavirus that's triggering the 6% crash in the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index. It's the oil price war that's broken out between major producing countries on the weekend that's the bigger driver for the panic.

It seems like a strange time to be starting a war of any kind given that global markets are already weakened by the economic fallout of COVID-19.

But there's a rational side to this irrational behaviour as OPEC goes to war (market war, not a physical one) with once ally Russia over crude.

Oil price war

OPEC wanted Russia to agree to extend production quotas to support the sagging crude oil price that was hit by falling demand for fuel. Quarantines and travel restrictions due to corona-crisis are curtailing the need for petrol.

But Russia refused to give in to Saudi Arabia's ultimatum (Saudi Arabia is the most significant OPEC member), which led the Arabian kingdom to offer very large discounts to European customers for its product.

Saudi's move is seen as a direct attack on Russia as the communist nation sells most of its crude to Europe.

US shale oil producers the real targets

It is also reported that Saudi Arabia is threatening to pump 12 million barrels of oil into the market. OPEC and Russia do not have to abide by any production limits now that negotiations have fallen through.

The interesting thing is that Russia's obstinance to strike a new deal isn't aimed at Saudi Arabia but at US shale producers. It's speculated that Russia wants to force down the price of oil to send US producers to the wall.

Several US shale companies carry a lot of debt and fear that these unconventional oil and gas producers could struggle to repay loans have caused havoc in the credit market.

Foolish takeaway

While the plunging oil price can't totally kill off the US shale industry (these assets will be brought back to life once oil rebounds), the disruption and chaos could limit US exports for quite a while – at least long enough for Russia to reap some big benefits.

Of course, it won't only be Russia that will benefit. Other oil producing nation, including Saudi Arabia, will be laughing to the bank.

But Saudi Arabia can't afford to offend its political ally US President Donald Trump, who must be watching the oil crash closely given that much of his support base comes from oil producing states.

ASX investors caught in the crossfire

The love-hate triangle will ensure that the oil price continues to swing wildly in the wind and its shareholders in ASX energy stocks that will be left to pick up the pieces.

Little wonder that the energy sector is the worst performer today. The Oil Search Limited (ASX: OSH) share price crashed 31% to $3.51, the Santos Ltd (ASX: STO) shed nearly a quarter of its value to $5.04 and the Woodside Petroleum Limited (ASX: WPL) share price plunged 17% to $21.97 in afternoon trade.

Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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