Question

DUBAI, March 7 (Reuters) - Saudi Arabia slashed its official selling price (OSP) for April for all its crude grades to all destinations, after OPEC's oil supply cut pact with Russia fell apart on Friday, sending oil into a tailspin.

State oil giant Saudi Aramco has set its Arab light crude oil to Asia for April at a discount of $3.10 to the Oman/Dubai average, down $6 a barrel from March, the company said in a statement late on Saturday.

It cut the April OSP of its Arab light crude oil to the United States to a discount of $3.75 per barrel versus ASCI, down $7 a barrel from March.

Aramco lowered its OSP for Arab light crude oil to Northwestern Europe to a discount of $10.25 per barrel to Ice Brent, down $8 a barrel.

A three-year pact between OPEC and Russia ended in acrimony on Friday after Moscow refused to support deeper oil cuts to cope with the outbreak of coronavirus and OPEC responded by removing all limits on its own production.

Oil prices plunged 10% as the development revived fears of a 2014 price crash, when Saudi Arabia and Russia fought for market share with U.S. shale oil producers, which have never participated in output-limiting pacts.

Saudi Arabia is the de facto leader of the Organization of the Petroleum Exporting Countries and the world's biggest oil exporter.

Q1 Why did the OPEC and Russia end their pact? Please explain

Q2 Why did the oil prices dip? Please explain

Answer 1

a) The oil is an essential commodity today and its output is concentrated in the OPEC countries. OPEC is a cartel of oil producing and exporting countries and Saudi Arabia in that cartel is the biggest oil producer in the world. However, Russia and the US with its shale oil are also in the list of the biggest oil producers in the world.
A couple of years back, Saudi Arabia fearing a rising competition from the US shale oil companies decided to cut the production. This has led to a record low price of oil to almost $25 per barrel. The cost of production for shale oil is higher and that forced many shale oil producers to bankruptcy. OPEC and other countries then agreed to cut the production to support the prices.

A recent outbreak of corona virus has very much affected the economy negatively. The falling oil demand means the OPEC+ needed to cut back production to keep the prices higher. However, Russia refused to cut the production because it though that output cut for the country is far higher and that could affect its economy. Russia has the oil as an important source for revenue.

If we look at it politically then we can say that Russia was looking for the chance to retaliate against the US sanctions. Russia will $100 million per day because of the price war but the move will hit harder to the US shale oil producers. The shale oil output is rising and that could threaten both the Saudi Arabia and Russia.
Russia has adopted the 'scorched earth' policy for retaliation.
Oil price have plunged 30% in a single day because of this deal collapse.

b) As per the deal. OPEC has asked the production cut to limit the supply and support the price in the world market. OPEC, the US and Russia were about to cut the production by 1.5% of total supply. However, Russia refused to cut the production citing it is too high and further declined to continue the agreed cuts according to the deal which was about to lapse in March. Already dampening demand because of the corona virus threat means any increase in supply will further push the price lower.
In response, Saudi Arabia cut its selling price and indicated that it will raise its production to defend the market share. An increased global supply menas there will be a further price cut in the global market.