Oil: what a brutal world!

We are living in turbulent times and our world can attest, since a few days ago, to the equivalent of a declaration of war taking place on the oil market. Saudi Arabia, that is suffering a fall of more than 20% of its exports to China (its biggest client) due to the coronavirus epidemic, hasn’t been able to persuade Russia – its partner in OPEC – to reduce its production in order to stabilise prices. A very recent call from the Saudi king to President Putin didn’t work either. It must be said that it’s now 3 years that Putin has been accommodating the Saudi ally by accepting all requests regarding production quotas and price objectives, not only to satisfy the Russian treasury but also to earn brownie points in foreign policy and tighten ties with the heir to the Arabian throne, Prince Mohammed bin Salman. Russia’s refusal to accept the Saudis’ demands at last Friday’s OPEC meeting is, in reality, a declaration of hostilities against the Trump administration, which never hesitates to use oil as an economic and political weapon.

Putin is in fact furious about the US sanctions that have contributed greatly to the sabotage of Nord Stream 2, the pipeline linking Siberian gas to Germany, and is angry about the US manoeuvres against the activities of Rosneft (that produces the Russians’ oil and that is owned by them) in Venezuela. Outdone by America’s strategy, Putin has not wavered in sacrificing OPEC’s (surface level) harmony to (try to) devastate US shale oil production by slashing prices. Well aware that the coronavirus – that has considerably diminished global energy consumption – is a curse for conventional producers and a windfall for US shale operators, Putin isn’t hesitating to put his own revenue in danger by choosing not to reduce production. His clear objective is to bring prices down further with the sole aim of weakening American producers that operate mainly thanks to bank funding that will no longer be granted to them once tariffs fall below a certain threshold.

The Russian machine can allow itself to do so because it holds substantial reserves thanks to a well-supplied sovereign wealth fund, with its oil and gas sales making up no more than 55% of its exports and with the country’s budget now financed by only a third of oil and gas revenue. Government policy and its country’s interests are obviously a priority for Putin, who (of course) doesn’t give a hoot about the almost existential threats to Saudi Arabia of an unbridled fall in oil tariffs, with the kingdom wholly dependent on its crude exports. The impact of this unilateral decision of Putin’s will therefore be heavy in economic, political and strategic consequences for the Saudis, whose budget is already terribly in deficit. In fact, the Wahhabist kingdom has been suffering from a lack of liquidity that is certainly not going to get better following the recent drama that caused a 10% + drop in oil prices in the space of a few hours and a fall in Aramco shares (the national producer) to below its last December IPO. The regional repercussions will inevitably be drastic – the Kuwait Stock Exchange, for example, has been forced to suspend listings due to a plunge of more than 10% – especially with the Saudi response to Russia’s manoeuvring being almost suicidal.

In an attempt to sabotage Russia’s oil sales to Europe, the Saudi authorities effectively just decreed a further reduction of their prices to their lowest in 20 years, and with immediate effect! Will Russia cave in to Saudi Arabia – and even to the Arabian world since the kingdom’s decision will determine the fate of the 14 million barrels exported daily by the region as a whole? Nothing is less certain, in fact, because Saudi Arabia’s credibility – for the least part – has been called into question by foreign investors who are being deterred by so much instability and unpredictability. The imprisonment at the same time, and in a new episode that is more comedy than tragedy, of eminent members of the royal family – including the king’s own brother – is obviously not going to restore confidence in a country that decidedly does not inspire much of it anymore.