In October 2017, King Salman of Saudi Arabia met Russian President Vladimir Putin in Moscow. This marked the first time a sitting Saudi monarch visited Russia, and was hailed as a historic event in Russian and Saudi media alike.
As two of the world’s leading oil exporters, Saudi Arabia and Russia are members of OPEC+, an expanded membership of OPEC formed in 2016 to have more control over the crude oil market. Oil has constituted the core of deepening Riyadh-Moscow relations – as well as the cause of the most recent rift and price war.
Oil and Coronavirus Don’t Mix
The COVID-19 pandemic brought oil demand to a crashing halt. Prices of Brent crude started the year around US$66 a barrel. By the close of February, Brent was trading around US$50 a barrel as lockdowns severely curtailed global oil demand.
In response, the Saudis requested OPEC+ to apply deep supply cuts equal to 1.5 million bpd amid the pandemic. Russia did not agree to the request, and this resulted in a flurry of finger-pointing – each side blaming the other for failing to honour their word.
Although most energy analysts dismiss the idea that the price war specifically targeted US shale, it would not be against Saudi interests to hurt the US shale industry. In 2014, Riyadh already tried to smother the then-nascent US shale industry in its crib by instigating another price war, but the Saudis disastrously misjudged the ability of the US shale sector to reshape itself into a much meaner, leaner, and lower-cost industry.
So when the Saudis asked Russia to contribute to the new cuts in 2020, Moscow calculated that Riyadh was doing the US a favour at Russia’s expense, because deeper cuts would complicate its position vis-à-vis several players when it came to market share. This would empower US shale companies, bringing more benefits to them, again at the expense of Moscow.
As Rosneft spokesperson Mikhail Leontiev put it, “If you always give in to partners, you are no longer partners. It’s called something else.”
A World of Hurt
The Saudis then proceeded to flood the market with oil. Brent crude started February trading at around US$50 a barrel – it would plummet to US$22 a barrel by the end of March.
The Saudis thought that they could come out of the oil war victorious because they could leverage an extra two million bpd compared to the Russian capacity of a few hundred thousand bpd. Russia was also under sanctions, and the ruble was swiftly depreciating.
However, Moscow knew that Riyadh could not use this leverage for long. The world’s crude storage capacity was about to reach its limit due to depressed demand amidst the COVID-19 pandemic. When this happened, it would force Riyadh to scale back the production without being able to force Moscow to agree to its terms. Moreover, Russia has greater foreign currency reserves than Saudi Arabia – allowing it to withstand the low oil prices for a longer time than Riyadh.
And that was precisely what happened. The Saudis blew through their savings at the fastest pace in nearly 20 years. Total foreign reserve assets fell by almost US$24 billion in March, according to the latest official data from the Saudi Arabian Monetary Authority, the kingdom’s central bank. The Saudis have just US$473 billion at the end of March, the lowest for nine years.
As a result, Riyadh has gone cap-in-hand to international debt markets to help close its funding gap, issuing some US$7 billion worth of bonds in April alone. But that was not enough – Saudi finance minister Mohammed al-Jadaan warned of “painful” measures to come. The Saudi government was forced to initiate a raft of austerity measures, including tripling the VAT rate and carving funding away from several of the kingdom’s Vision 2030 projects, a blueprint for diversifying the kingdom’s economy away from fossil fuels. The bill for the kingdom’s price war is effectively falling on the shoulders of ordinary Saudis.
Some Wars Cannot be Won
The Saudi-Russia oil price war also signals a huge loss of face for the Saudis on the international stage. Saudi actions didn’t just alienate the Russians – Saudi-US relations are also strained due to the price war’s effects on US shale.
Two senators have already introduced legislation that called for the US to remove troops from Saudi Arabia if the kingdom did not stop pumping so much crude. “The Saudis spent over a month waging war on American oil producers, all while our troops protected theirs. That’s not how friends treat friends,” said Senator Kevin Cramer of North Dakota. “Saudi Arabia’s next steps will determine whether our strategic partnership is salvageable.” Texas Senator Ted Cruz was even more blunt, saying that, “If you want to behave like our enemy, we’ll treat you like our enemy.”
Riyadh also announced a unilateral ceasefire in Yemen, ostensibly due to concerns over COVID-19. But in feeling the pain of low oil prices and high costs of their military adventure against the Houthis, the Saudis seem more constrained than ever.
For now, OPEC+ has agreed to production cuts to the end of July. The 10 million bpd cut represents around 10 percent of the world’s overall supply. Easing COVID-19 measures worldwide may herald an oil price recovery, but prices are expected to remain weak through to 2021. The US Energy Information Administration (EIA) projects that Brent crude will average at US$34 per barrel in 2020 and US$48 per barrel in 2021 – far below the IMF break-even price of US$76 per barrel that Saudi Arabia needs to stay afloat.