Saudi optimism about market endures despite ‘price war’ with Russia

Following the failure to reach a compromise in Vienna, Riyadh, as the world’s oil swing producer, said it would open the taps.
Sunday 15/03/2020
Saudi Energy minister Prince Abdulaziz bin Salman. (Reuters)
Saudi Energy minister Prince Abdulaziz bin Salman. (Reuters)

LONDON - The announcement that Saudi Arabia would increase the production of oil to be sold at discounted prices rocked global markets, plunged the price of oil and signalled a breakdown in the alliance with Russia that had worked to stabilise energy markets since 2016.

What was dubbed “oil price wars” was, in fact, an attempt by Saudi Arabia to preserve its global market share, analysts said.

OPEC, in a meeting March 6 with Russian oil officials, had hoped to agree on cuts in oil production of 1.5 million barrels per day (bpd) to address an expected drop in demand related to the coronavirus outbreak.

However, Russian Energy Minister Alexander Novak said Russia would not be making further cuts, a decision based on the Kremlin’s talks with Russian oil companies opposed to production reduction.

Although reports highlighted the surprise among OPEC members at Novak’s statement, it appears Saudi Arabia was prepared to act if negotiations failed.

Discord developed between Riyadh and Moscow in February when Saudi King Salman bin Abdulaziz Al Saud reached out to Russian President Vladimir Putin to discuss output restrictions, the Wall Street Journal reported. Saudi officials told the US newspaper that Putin refused to commit to output cuts, which was probably viewed in Riyadh as an indication of what Novak might tell OPEC.

The US shale oil industry appears to be a major factor in Russia’s decision. “Moscow’s refusal to join with the cartel is aimed in part at drowning US shale oil companies that rely on higher prices in a sea of cheap crude,” a CNN analysis by Matt Egan said.

“Putin’s goal is to wrest market share back from American frackers, whose debt-fuelled growth caused Russia to lose its title in 2018 as the world’s largest oil producer,” Egan said in the CNN report.

Russia also disputes the Trump administration’s decision last year to impose sanctions on Russia’s Nord Stream 2 project, a pipeline linking Russia to Europe. In February, the White House sanctioned a subsidiary of Russian state oil major Rosneft operation in Venezuela.

Following the failure to reach a compromise in Vienna, Riyadh, as the world’s oil swing producer, said it would open the taps.

“Saudi Aramco announces that it received a directive from the Ministry of Energy to increase its maximum sustainable capacity from 12 million bpd to 13 million bpd,” the company said in a statement to the Saudi Stock Exchange.

Saudi Arabia apparently was not prepared to be a casualty of the US-Russian dispute, particularly after Riyadh’s efforts to stabilise the market since 2016 benefited both Russia and the United States.

“The drop in oil demand because of the coronavirus meant that the OPEC members plus Russia were supposed to coordinate reductions in production because of the fall in demand,” a former Gulf energy official told The Arab Weekly.

“The OPEC members other than Russia all agreed on this cut. However, Russia wanted to keep production as it wished, which runs contrary to what they have been doing for the last two or three years, coordinating with OPEC.”

“Here Russia can disturb the market and take over sectors if [it keeps] on not reducing production,” the former energy official said, stressing that for Saudi Arabia to preserve its market share, it decided to fight this tendency by the Russians.

“That means we are going to push production to 13 million barrels per day, which will bring prices down, admittedly, but for the short term this is what will happen and, in the long term, it will improve as demand picks up, as fears over the coronavirus dissipate.”

The United Arab Emirates said on March 11 that it was joining Saudi Arabia in increasing daily oil output. “In line with our production capacity growth strategy… we are in a position to supply the market with more than 4 million barrels per day in April,” the Abu Dhabi National Oil Company said in a statement.

The Russians apparently blinked even before the UAE announcement. On March 10, Novak and Kremlin spokesman Dmitry Peskov suggested that Russia remains open to an agreement with Saudi Arabia on oil supplies.

“I want to say the doors are not closed,” Novak told the Rossiya 24 state news channel. “The fact that the agreement has not been extended after April 1 does not mean that we cannot continue to cooperate with the OPEC and non-OPEC countries.”

Peskov suggested it was possible for Russia and Saudi Arabia to reach a compromise. “No one is excluding this possibility and Novak has spoken about this,” Peskov told RIA Novosti news agency.