The messages behind Saudi Arabia's oil market moves

The recent reaction from Riyadh was to remind the world of Saudi Arabia’s oil potential.
Sunday 29/03/2020
Proactive mode. A general view of Saudi Aramco's Abqaiq oil processing plant. (AFP)
Proactive mode. A general view of Saudi Aramco's Abqaiq oil processing plant. (AFP)

The shift in Saudi oil strategy from working in silence and through diplomatic messages to reacting openly and swiftly to Russia's moves serves Saudi national interests in view of the intense competition with Moscow and Washington and the threat to Riyadh’s position in the global energy market as the original oil source in the Gulf.

Under former US President Barack Obama, Washington tried to dispense with its reliance on Saudi oil and limit Riyadh’s global role by encouraging shale oil operations in the United States.

Moscow focused its attention on encroaching on Asian markets by increasing production and threatening Saudi exports to China, India and other countries in that region.

However, the recent reaction from Riyadh was to remind the world of Saudi Arabia’s oil potential and of its historical role in supplying the world with oil when others were unable to do so, by keeping prices low so as not to affect economic growth in importing countries and by preventing prices from falling to dangerous levels so as not to affect the economies of exporting countries.

Riyadh's action was also meant to remind consuming countries that by reducing oil production and raising prices, Saudi Arabia and its allies were proactively helping them to stop wasting oil products resulting from the oil glut, rationalise energy use and mitigate environmental effects.

However, the most important Saudi message was addressed to producing countries. It reminded them that, even if the United States becomes the first oil producer globally, followed by Russia, Saudi Arabia remains a key player because of its huge reserves and low extraction costs, features it shares with the other oil-producing Gulf countries.

This is why a New York oil market expert said that even in the event of a total collapse of oil prices, “the Gulf countries are the only ones that can afford these prices and that, in the event of a significant drop in oil demand, the Gulf countries are the only ones that will remain on the market and that, in the event of oil depletion around the world, Gulf oil will be the last one to go.”

By creating this new situation, Saudi Arabia aims to force Russia and other countries to reduce production as required to achieve a balance in the markets. It is clear that its goal is not to immediately return to the negotiating table. A source in London said Saudi Arabia is targeting Russia's oil markets wherever they are but especially in Europe.

Most additional Saudi shipments are to go to Europe as well. While media reports suggest the existence of Saudi-US coordination on price cuts, the uproar in the Texas shale oil sector seems to indicate the opposite.

As for US President Donald Trump, who is comfortable with lowering gasoline prices in the United States because it helps his re-election campaign, he does not want to risk antagonising the powerful US oil industry lobby. He is trying to build a balanced position that would allow him to take advantage of the price cuts to increase the United States’ oil reserves and maintain pressure on Moscow.

Saudi Arabia’s oil war is reminiscent of King Faisal bin Abdulaziz’s actions during OPEC’s golden era. King Salman bin Abdulaziz Al Saud and Crown Prince Mohammed bin Salman bin Abdulaziz are seeking to lead the kingdom out of the current war with the least damage possible in the short term while betting on the advantages of preserving Saudi Arabia’s historic position and role in the global market and in a competition that some players wanted to be without rules.

Despite Russian pressure and calls by some in the US Congress to punish Saudi Arabia, Riyadh appears serene with its choices at this delicate stage, which guarantee its rights and the rights of its allies while sending messages to Trump, the US Democratic Party and anyone intent on blackmailing it or endangering its interests that it is truly the pluralistic world in which we live and the needs of global markets that cwill determine the direction of the oil market.