The Russia-Saudi oil price war: How it could end?

A- A A+

A Russian Bear without Claws?

It seems that Putin has forgotten to read the Art of War by Tsun Tzu, several main quotes from which should have been taken on board by Moscow advisors before hitting the market:

“If your enemy is secure at all points, be prepared for him. If he is superior in strength, evade him. If your opponent is temperamental, seek to irritate him. Pretend to be weak, that he may grow arrogant. If he is taking his ease, give him no rest. If his forces are united, separate them. If sovereign and subject are in accord, put division between them. Attack him where he is unprepared, appear where you are not expected.”

“The supreme art of war is to subdue the enemy without fighting.”

“Supreme excellence consists of breaking the enemy’s resistance without fighting.”

“If you know the enemy and know yourself, you need not fear the result of a hundred battles. If you know yourself but not the enemy, for every victory gained you will also suffer a defeat. If you know neither the enemy nor yourself, you will succumb in every battle.”

“Strategy without tactics is the slowest route to victory. Tactics without strategy is the noise before defeat.”

The main advice from ‘Art of War,’ however, is:

At present Moscow’s approach seems to be almost like a Trumpian playbook of trade wars: “be prepared to take short-term damage if you think your opponents will be forced to concede.”Here, however, Putin has not been taking on Washington, NATO or Brussels, but Riyadh’s Machiavelli-lover Crown Prince Mohammed bin Salman and his brother in arms Abu Dhabi Crown Prince Mohammed bin Zayed. MBS seems to be an avid reader of Machiavelli as his current strategy seems to be built on the following ‘Il Principe’ quotes:

“Everyone sees what you appear to be, few experience what you really are.”

 “The first method for estimating the intelligence of a ruler is to look at the men he has around him.”

“Never attempt to win by force what can be won by deception.”

“All courses of action are risky, so prudence is not avoiding danger (it’s impossible), but calculating risk and acting decisively. Make mistakes of ambition and not mistakes of sloth. Develop the strength to do bold things, not the strength to suffer.”

MBS’s current strategy is surely built on two others:

“I’m not interested in preserving the status quo; I want to overthrow it.”

“it is much safer to be feared than loved because … love is preserved by the link of obligation which, owing to the baseness of men, is broken at every opportunity for their advantage; but fear preserves you with a dread of punishment, which never fails.”

At the same time, Putin is now being confronted by MBS’s strategy, which is linked to “…he who seeks to deceive will always find someone who will allow himself to be deceived.”

Looking at the Russian standpoint in the current crisis, it seems that part of the Moscow strategy is based on the fact that Putin is retaliating for US sanctions put on Russia and Russian oil and gas companies last year. Putin already warned the US that he would take action to hit the oil market after Washington signed new sanctions into law in 2019. With the current OPEC+ bromance and perceived split-up, Moscow is betting on two horses. The first is that by taking on US shale oil Washington (especially Trump) will be hit and forced into a corner, while his current conflict with Riyadh is a tactical choice that can be solved before the end of 2020. Without any doubt, Putin is looking long-term, betting on a possible honeymoon with Riyadh again, as that will be necessary and beneficial not only for Russia-Saudi Arabia but also to take advantage of any possible upward price potential in the coming months.

Putin’s current strategy has been based on a long-term assessment, which was made easier by US politicians stating their strategies even before putting them into action. He has been able to prepare, as Tsun Tzu would have loved, for any negative outfall from his confrontation with the US. As indicated before in the press, Putin and his backers have warned the US and EU against any sanctions or blockades with regard to the Russian-EU gas pipeline project NordStream-2 and Turkstream. At the same time, EU and USA strategies have made it easier for Putin to mitigate possible negative effects in recent years. At present, Moscow’s position in the European energy markets remains largely intact. In reality, Russia is well-prepared to take on US opposition. The current move is clearly also a direct attack on the growing US energy involvement in the European arena, as Washington has been actively pursuing energy supplies to it, promoting US LNG and oil to clients. By attacking Russia on its so-called home turf (the EU), a confrontation was imminent. Putin’s strategic thinking at present has been well-represented by Igor Sechin, CEO of Russian oil producer Rosneft. Even though he stated that Russia and Saudi Arabia should maintain contact, he openly questioned the current OPEC+ production cut deal.

Sechin is still supportive of OPEC+ but he reiterated that several oil producing countries are not part of the deal and do not plan to join it, questioning the purpose of the cuts. He also gave an indication of the current strategy (even for Saudi Arabia):“If you give up your market share, you will never return there, and here is the point. The price will adjust (sooner or later). But if you lose your customers, you will never win them back again.”

In the short term, Moscow’s targets seem to be reachable, as US shale oil is currently fighting for its life. Where, however, Putin made a costly miscalculation was to misjudge Saudi Arabia’s potential answer. While Europe, especially the Port of Rotterdam, has been mainly a Russian controlled oil client base, the Kingdom has now openly opened a new front. Riyadh’s eagerness to regain market share not only includes US-Asian markets but right now also Europe. The main difference between before OPEC+ and now is the fact that Saudi Arabia has the financial means to not only counter lower oil prices but also to take a hit for a longer period.

Within the OPEC+ scenario, Moscow also has been relying on one of the outcomes of the Russia-OPEC marriage being Arab Gulf States not only supporting higher oil prices but also supporting Moscow by mitigating the financial repercussions of US sanctions. Qatar has been very active in this way, as seen from the QP minority stake in Russian oil giant Rosneft. Saudi Arabia and the UAE, as the main OPEC producers, however, have been active but not at the levels Moscow was hoping for, hence the reasoning that the current OPEC+ conflict is a way for Putin to get more bilateral financial and economic-military cooperation with Arab Gulf producers. One possible way to get all parties back to the table will be to hold in front of Moscow a financial carrot of GCC investments in Russian oil-gas and defence industries. This should not be linked to direct investments by Aramco or ADNOC but could be done through the respective sovereign wealth funds, such as PIF, ADIA, Mubadala and others.

If Riyadh or Abu Dhabi want to find a solution to the current conflict with Moscow, the most effective road to take is to get the financial giants of the region on a plane to Moscow to see that mutual interests are covered. The current media attention to Aramco, ADNOC, Gazprom and others is not yet allowing open discussions. Putin’s advisors will understand that new investments and cooperation between OPEC producers and Russian oligarchs will smooth up any possible open marriage counselling.

A MAD scenario or light at end of the tunnel?

US-based analysis is still looking at Russia’s capabilities vs Saudi options. Washington’s assessments seem to be based on the Mutual Assured Destruction (MAD) theory of the Cold War. Historical hindsight here, however, is not going to provide a prudent way of working. Military destruction is costly to all, while economic and geopolitical power struggles can be dealt with in the long term, even if the costs are staggering. This mostly favours Russian long-term options, hinting at Saudi budget constraints and the need for higher oil prices to cover spending habits. Such assessments are, however, flawed. Even though Russia’s bluff is based on a stronger footing than ever before, the Russian economy is still very meagre and overwhelmingly linked to oil and gas revenue.

Source: Rystad Energy Research and Analysis, IEA

Russian foreign reserves are vast, but Moscow’s spending habits are not easy to change dramatically. Saudi Arabia’s reserves have also accrued to high levels, while its budgets have been high too. Lower oil prices will certainly hit the Kingdom, but it has one advantage over Moscow. Riyadh still has full access to global financial markets and a reasonably positive reputation there. Without fully evaporating its reserves, the Kingdom can access financial markets for debt financing and new bond issues. Moscow does not have these options as most of the sanctions put on Russian institutions and persons constrict or even block its access to the markets.

However, there could still be a little light shining at the end of the tunnel for the oil market. When the current OPEC+ crisis started the oil market had already counted in the possible production cuts that were needed to counter pre-corona oil market issues. When Saudi Arabia and Russia are able to find some common ground again to cut output, a renewed impact of this strategy could hit the market as at that time the current oil glut could have subsided already due to shut-downs and extreme low drilling and investment. A part of the glut could also have been removed due to disruptions in the supply chain, there being no available additional oil storage volume and bankruptcies.

Some even argue that the OPEC+ crisis was already in the minds of Moscow and Riyadh as they understood that whatever measures OPEC+ would take coronavirus impacts would still be overwhelming demand. This means that, despite OPEC+ agreeing to continue its oil output cuts, oil prices were eventually going to go down.

Source: Rystad Energy Research and Analysis, OilMarketCube

If OPEC and Russia had committed to another major multibillion production cut a day, the oil market would still be in shambles if current assessments (IEA-OPEC) are right that demand destruction levels could hit 20 million bpd in the next weeks. With an OPEC+ cut in place and prices possibly hitting $20 a barrel or less, the upside impact of another production cut would be minimal. Some agree that it was going to be extremely difficult for oil prices to pick up again and go back to the $50-$60 a barrel level once the world economy recovers from the impact of coronavirus crisis. The oil cartel and Russia would have had no real instruments available to stabilise the market in future. At present, oil prices are declining, due to corona lockdowns, demand destruction and OPEC+ being in trouble. If the corona and OPEC+ factors are again in a more positive environment, the impact of Vienna-Moscow cuts will be strong.

Blink or Black Eye Approach?

In the coming weeks, after the dust of corona and oil demand destruction has settled, even if the crisis is far from over attention needs to be given to messages coming online (Twitter/Media) from unofficial sources or private companies in Saudi Arabia and Russia to find indications of stress factors. The main question still is ‘Who will blink first?’ As the main parties in the conflict are hiding behind coronavirus issues, unemployment or elections, news is meagre or even non-existent. No real assessment can be made of where Moscow-Riyadh or OPEC+ vs US shale is heading. Maybe we should be looking at other players and their moves. Abu Dhabi’s Crown Prince Mohammed bin Zayed could be a first indicator of change. When MBZ opens up discussions with Moscow not linked to oil and gas, the media should be waking up. MBZ’s links to inner power circles in Riyadh are strong and MBS is able to use MBZ as a dealmaker without blinking himself. For Moscow, the same option is there. No real emphasis at present should be put on Russia’s purported strength to extend the current crisis. Even if Russia’s economy is more diversified, its budget requirements are also more stressed, especially when looking at the currently forgotten financial drain on Russia due to Syria, Iran, Libya and ongoing issues with Turkey. Russia’s lifeline of natural gas exports is also in shambles, as not only European demand but also China is hit. Financially the picture is clear, Riyadh’s foreign reserves are greater than Moscow’s: $496 billion (Sept 2019) vs $419 billion.

The first signs that the Russian bear is blinking, even if behind closed doors, are the increased continuing press statements by leading Russian oligarchs that a market stabilisation effort by OPEC+ is still needed, even if it needs to be revamped on a different basis. So far, no such views have come from the Royal Palaces in Riyadh, Jeddah or Aramco HQ. The market is heading towards a destruction point or an abyss, but the OPEC+ leaders still seem to be waiting for the Russian bear to get out of his hole. Putin will have to make the first move; at present MBS is not willing to take the step.

Source: Bloomberg Economics

Without coming together and setting up OPEC+ 2.0, the other goal is not achievable. US shale oil is hit and prices are pushing not only shale oil producers over the cliff but are also destroying oilfield service companies too. Moscow and Riyadh can now go out and catch the big white whale, but if no cooperation is set up, the whale could become Moby Dick and continue haunting the market for decades to come.


* Cyril Widdershoven is Founder and Sr. Advisor at Verocy, and Global Head Strategy & Risk Berry Commodities

From the same author, read also:

Is Saudi Arabia’s oil market dominance Pyrrhic Victory? 6 April 2020

Geopolitics and conflicts hit Aramco’s IPO, Crown Prince turns East 2 December 2019