Question

An intensifying oil price war between Saudi Arabia and Russia has created “very painful” market conditions for the world’s largest crude oil producers. International benchmark Brent crude traded at $32.97 Thursday, down almost 8%, while U.S. West Texas Intermediate (WTI) stood at $30.40, around 7.8% lower. Oil prices have almost halved since the start of the year.
Last week, Saudi Arabia failed to secure Moscow’s support for deeper output cuts at a meeting of the Organization of the Petroleum Exporting Countries and its allies, known as OPEC plus. OPEC had proposed to deepen cuts by 1.5 million barrels per day and Russia was asked to cut an extra 300,000 bpd.
“There was no point in cutting until after everyone understood how sharply demand could fall. We cannot fight a falling demand situation when there is no clarity about where the bottom (of demand) is,” Pavel Sorokin, the Russia’s deputy energy minister, said.
“It is very easy to get caught in a circle when, by cutting once, you get into an even worse situation: oil prices would shortly bounce back before falling again as demand continued to fall.”
Cooperation between two (Saudi Arabia and Russia) of the world’s three largest oil producers — the third is the United States — appears to be at an end.
2How a Saudi-Russian Standoff Sent Oil Markets Into a Frenzy. 9th March 2020. New York Times
Russia to OPEC - deeper oil cuts won't work. 12th March 2020. Reuter
The losers — and even bigger losers — of an oil price war between Saudi Arabia and Russia. 12th March 2020. CNBC
a) With aid of diagram, explain how the fall in crude oil demand affect the output of OPEC plus members.
b) Discuss why Russia refuse to follow Saudi Arabia’s proposal to cut crude oil production with aid of diagram.

Answer 1

a) The world has witnessed some volatile developments in the crude oil market as the prices plummeted as Saudi Arabia decreased its reference rate for selling. This move came after its cooperation with Russia to stave off any fall in the crude prices by balancing the production ended abruptly as Russia refused to carry out any cuts.
Saudi Arabia and Russia are one of the two biggest oil producers in the world and any end of cooperation ensured the price war for the market share. As the supply was not reduced and price has fallen which resulted in revenue loss for the oil exporting countries in the event of falling demand.

2) Russia and Saudi Arabia has been cooperating with each other since last three years so avoid any steep change in the oil prices considering its importance to the world economy as well as the dependency of the OPEC countries on the commodity. However, Russia refused to carry out any cuts its oil production citing that is demand is already falling and any cut will increase the price but might reduce the demand further and that will create a vicious cycle.
Russia stressed that falling demand will be exacerbated by supply cuts and resultant increase in price won't be able to deliver any gain in the face of further leftward shift of demand.