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-How has corona virus affected the oil economy? Please explain

Q2-Why the three year pact between OPEC and Russia ended? It's effect on economy? Please explain

Answer 1

a) Corona virus is the latest outbreak of virus originated from the Wuhan in China. This virus is contagious in nature and can be transmitted through air or by touching the person. The corona is a large family of viruses and the recent one identified has no vaccine in current scenario. The spread of the disease was quite quick and because it could be spread through air so the people are avoiding travelling or transportation where there could be public contacts.
The fear, panic has decreased demand for air travelling and transportation and that has resulted in the decreased demand for the fuel or oil.

b) Saudi Arabia and Russia are one of the biggest producers of the oil in the world. They had agreed upon a production cut three years ago to limit the supply and keep the price of the crude steady. The recent outbreak of corona virus has affected the economy negatively and decreased the demand for oil. OPEC+ has asked the members to cut the production by 1.5% of the total global output to which Russia has refused citing that is too high.
A higher price of the crude will be good for all players but it will also favor the US hale oil producers. Any output cut will be filled up by the US producers. Russia also wants to retaliate the US for its sanctions and so it decided to go for the market share. Russia could incur a loss of $100 million per day because of lower prices but it will be still comfortable if the crude is around $42 per barrel. That price will be too low for the US shale oil producers to carry on business.