Dow Futures Down 1,000 Points, Oil Crashing 27%

Yes, you’ve seen your share of headlines recently about stocks on a roller coaster. And indeed they are on one still.

The Dow, if it were to open right now, would be down more than 1,000 points.

But Saudi Arabia just threw a new wrench in the mix, slashing oil prices, igniting a price war at a time when the markets are as anxious as can be.

What’s happening?

Over the weekend OPEC met to discuss how to deal with falling oil prices, which have been dropping in the wake of coronavirus (fewer people go out, fewer businesses operate, that means less energy demand, hence lower prices.). But rather than agreeing to support energy price stability, the talks fizzled, Saudi Arabia walked and cut oil prices, sending U.S. crude oil plunging 27% to $30 a barrel.

I thought lower oil prices meant lower gas prices, and isn’t that a good thing?

The national average for a gallon of regular tonight is $2.36. Prices will likely fall 10 cents this week and if these declines hold, you’ll almost certainly see prices get below $2. Though at a time when we are self-quarantining, reducing travel, when businesses are telling people not to come to work, and many of us are doing as much as possible to have as little contact with the outside world as possible, paying less at the gas station isn’t much of a stimulus plan.

The more immediate issue that concerns Wall St. is the health of the U.S. energy industry which employs 6.7 million people. The U.S. is the largest producer of oil by far, producing far more than Saudi Arabia. At $30/barrel or lower, some energy producers won’t make enough to cover their costs. All of them will see their profits squeezed. How did we pay for drill baby drill? With billions in debt. And that debt’s about to come due. North American oil and gas companies have more than $200B maturing in the next four years, with more than $40B due this year according to Moody’s Investors Service. The bottom line: at these prices, bankruptcy is on the table for a number of U.S. energy companies.

And why would the Saudis do this?

Friction between the Saudis and Russia. Saudi Arabia is hoping to take share of the global oil markets away from Moscow. But in suppressing prices, they not only put Russian oil at risk, they do the same to U.S. energy companies. And it wouldn’t be the first time they’ve used this playbook. Back in 2014, the Saudis crashed prices, which led to major layoffs in U.S. and global energy.