Royal Dutch Shell and BP lose more than £32bn from their combined market value

The oil price war in Saudi Arabia wiped billions of pounds off the market value of the largest companies in the industry after the oil markets experienced one of the largest price drops in history.

The decision by the world’s largest oil-producing nation to increase production despite the outbreak of the corona virus blocking global oil demand triggered a 30% drop in oil prices Monday morning.

The oil price shock resulted in the British oil giants Royal Dutch Shell and BP losing more than £ 32bn of their combined market value within minutes of the London Stock Exchange opening.
FTSE on track for the biggest decline since the financial crisis
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The pair led the FTSE 100 to its sharpest decline since the global financial crisis in 2008, when the index fell 8.3% due to growing concerns about the economic impact of the corona virus. At midday it fell by 6.8%.

Shell lost a fifth of its market value in early trading, while BP’s shares fell 27% after the global reference oil price plummeted since the Gulf War in 1991.

Industry experts fear that a longer oil price war could force companies to rethink their dividends and mean bankruptcy for smaller commodity trading houses.

By morning, BP, which was worth £ 79.5 billion on Friday, was worth £ 63.6 billion after the share price dropped about 20% to 322p per share. Shell’s London-listed shares fell more than 13% to around £ 13 a share, effectively wiping off the £ 16.8bn firm, which is now worth £ 108bn.

In the FTSE 250, Premier Oil shares fell 51%, while Tullow Oil fell 26%.

Oil companies are facing an uncertain year after the outbreak of the coronavirus in China, which has wiped out oil growth forecasts for the year and may lead to a decline in oil demand.

Redburn analysts warned that a six-month price war could severely affect oil companies’ profits and potentially end dividends in favor of paying investors in corporate stocks.

Shell and the US oil giant ExxonMobil are considered to be the most affected by the market crash as they have high breakeven oil prices. Exxon is demanding oil prices of around $ 74 a barrel to cover its costs, while Shell needs $ 65 a barrel to break even, the analysts said. BP is relatively stronger thanks to a breakeven oil price of $ 53 a barrel.

The effects of the corona virus caused oil prices to drop to a one-year low below $ 50 a barrel last week, from almost $ 69 earlier this year. However, Saudi Arabia’s decision to start a price war against its oil competitors by ramping up oil production led to a drop in price this morning of $ 33 a barrel.

According to an Oil Price Reporting Agency, the Saudi price war could lower oil prices below USD 30 a barrel for the first time since the oil price crash in 2016.

The Saudi Arabia-led Opec oil cartel had hoped to avert an oil market crash by cutting oil production in line with falling demand. But talks collapsed on Friday after Russia refused to hold back its production. At the weekend, Riyadh outlined plans to boost oil production and sell it at a discount to key customers. Analysts believe this should maintain its dominance in the oil market.

Bjørnar Tonhaugen, oil director at Rystad Energy, said the market volatility caused by Saudi Arabia’s “shock and awe strategy” could lead to “bankruptcies among trading firms” while others thrive. Adding “Markets are driven by greed and fear but among these two emotions, fear is the again strongest.”