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Simon Watkins

Simon Watkins

Simon Watkins is a former senior FX trader and salesman, financial journalist, and best-selling author. He was Head of Forex Institutional Sales and Trading for…

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Saudi Arabia Reaffirms Commitment To Russia Despite War In Ukraine

  • Saudi Crown Prince Mohammed bin Salman has reaffirmed his country's commitment to the OPEC+ agreement with Russia.
  • The Kingdom has not made a move to bring extra crude onto the market despite the current spike in crude prices.
  • Since 2017, Russia and Saudi Arabia have signed a string of high-profile energy deals that have pulled the Kingdom away from the U.S. sphere of influence. 
Salman Putin

Saudi Arabia’s Crown Prince Mohammed bin Salman (MbS) reiterated last week his country’s “commitment to the ‘OPEC+’ agreement” – working alongside the agreement’s other key partner, Russia - despite the ongoing Russian invasion of Ukraine. MbS sought to couch this extraordinary re-assertion of his country’s alliance with Russia in terms of the “the kingdom’s keenness on the stability and balance of oil markets”. However, this idea was quickly undermined by the announcement of that the ongoing modest rise of 400,000 barrels per day (bpd) in collective output seen over the past few months will continue, despite the economic damage being done to many developed economies by current high oil and gas prices. In reality, what MbS’s comment underlined was the broad-based strategic political and economic shift seen by Saudi Arabia since the end of the 2014-2016 Oil Price War, away from the U.S.’s sphere of influence and towards that of China and Russia.

The catalyst for this seismic shift in geopolitical alliances was the failure of the 2014-2016 Oil Price War, which was launched with the specific intention by Saudi Arabia to destroy - or at least severely disable for as many years as possible – the U.S.’s then-nascent shale oil sector, as analysed in depth in my new book on the global oil markets. It was obvious to the Saudis at that point – and indeed to the U.S. – that the unchecked build-out of lower fixed cost oil in increasingly large volumes would mean the gradual but extreme diminution of Saudi Arabia’s power in the world and as a key player in the Middle East, given that its only true basis of power is its oil supplies. It would also mean that the U.S. would be less inclined to support Saudi on any and all matters, regardless of how broadly unpalatable they might be. In short, the Saudis had no real choice but to try to take on the US’s shale sector, and it did, and it lost and it – and every one of its OPEC brothers - paid a terrible economic price, exacerbated by the 2020 Oil Price War. 

The immediate aftermath of the 2014-2016 Oil Price War was not only that Saudi had devastated its own economy and those of other OPEC member states for years to come but, more importantly from a geopolitical perspective, that it had lost its credibility as the de facto leader of OPEC and that OPEC had lost its credibility as the indomitable force in global oil markets. This meant that OPEC’s pronouncements on future oil supply and demand levels – and therefore, on pricing – had lost much of their potency to move markets in and of themselves, and that their joint production deals were diminished in effectiveness. At the end of 2016, then, and fully cognisant of the enormous economic and geopolitical possibilities that were available to it by becoming a core participant in the crude oil supply/demand/pricing matrix, Russia agreed to support the OPEC production cut deal in what was to be called from then-on ‘OPEC+’, albeit in its own uniquely self-serving and ruthless fashion, as has subsequently transpired, and as is also examined in full in my new book on the global oil markets.

Since then, Russia has used its position as the most important player in the OPEC+ alliance to do what it does best: cause pockets of chaos into which it can project its own solutions and thus extend its power. In the case of the Middle East more broadly, this cornerstone strategy has been employed in virtually all of the Shia crescent countries – albeit most obviously recently in Iran, Iraq, and Syria – but it has also been systematically whittling away at the foundation stones of the longstanding U.S.-Saudi alliance. As also highlighted in my latest book, the basis for this relationship had been agreed at a meeting on 14 February 1945 between the then-U.S. President Franklin D. Roosevelt and the Saudi King at the time, Abdulaziz. The deal was this: the U.S. would receive all of the oil supplies it needed for as long as Saudi had oil in place, in return for which the U.S. would guarantee the security both of the ruling House of Saud and, by extension, of Saudi Arabia. By the end of the 2014-2016 Oil Price War, though, the agreement had been changed to reflect the growing U.S. impatience with Saudi’s attempts to hamper the development of its shale oil sector. The U.S. said that it would still safeguard the security of Saudi Arabia and its ruling family but added that caveat that this would only continue provided that Saudi Arabia did not attempt to interfere with the growth and prosperity of the U.S. shale oil sector. For Saudi Arabia, given the U.S.’s burgeoning shale oil sector, this was the equivalent of someone being glued on a track in a train tunnel and being forced to watch as the train relentlessly speeds towards them.

Following the disastrous 2014-2016 Oil Price War, then, October 2017 saw Russia’s President, Vladimir Putin, invited Saudi Arabia’s King, Salman bin Abdulaziz al-Saud, to Moscow - the first ever visit to Russia’s capital city made by a sitting Saudi monarch. It was also the largest ever foreign delegation to Moscow, and King Salman’s presence – given that he does not usually do such visits – showed how significantly Saudi viewed its relationship with Russia from that point. At this meeting, and the many meetings on the sidelines between officials of the two countries in which the real business is done, US$3 billion or so of specific deals were agreed across a wide range of areas, not just in the oil sector. Russia’s Energy Minister, Alexander Novak, flagged at the time that Russian gas producer Novatek was in talks for Saudi investors to take part in its Arctic LNG-2 project, a follow-up to its US$27 billion plant in the Yamal peninsula. It was also agreed that Saudi Arabia’s sovereign wealth fund, the Public Investment Fund (PIF), was to establish a US$1 billion fund alongside Russia’s sovereign wealth fund, the Russian Direct Investment Fund (RDIF), which would invest in Russian technology companies. In the same vein, Russian state-owned hydrocarbons companies Rosneft and Gazprom entered talks with their counterpart, Saudi Aramco, to conduct co-ordinated oil and gas trading operations and the establishing of a joint research and technology centre. Bad though all of this was from Washington’s perspective, even worse were two broader political and military developments. One of these was that Saudi Arabia rowed back on its demand that Syria’s President Bashar al-Assad be removed from power. The other, and perhaps more extraordinary, was that Saudi Arabia signed a memorandum of understanding for the purchase from Russia of its S-400 air defence system. 

By the time that the 2019 visit to Moscow of MbS himself came around, Russia was in an even stronger position. Firstly, Saudi Arabia’s finances were still deteriorating markedly, given that its then-US$84 per barrel of Brent budget breakeven price was still higher than the spot oil price. Moreover, any attempt to move the oil price up had been effectively cut-off by U.S. President Donald Trump’s Tweet that: “He [Saudi King Salman] would not last in power for two weeks without the backing of the U.S. military.” Secondly, Saudi’s security vulnerability had been shown up by the rocket attacks on 14 September 2019 by the Iran-backed Houthis on two of the Kingdom’s key oil facilities – the massive Abqaiq oil processing facility and the Khurais oil field. At the October 2019 meetings led by MbS and Putin a slew of further deals was announced. For example, the RDIF, Saudi Aramco and Saudi’s PIF agreed to jointly acquire a 30.76 percent stake in Russian oilfield services company, Novomet, from Rosnano, marking the first joint investment by the three entities through the energy investment platform that they set up in 2017. Aramco also signed agreements for equipment and chemical supplies with Angara Service, Chelpipe, Galen, Integra, NKT, Technovek, TMK and Intratool. The RDIF and Russian private equity group ESN agreed with Saudi petchems giant, SABIC, that they would jointly invest in the design, construction and operation of a methanol plant in Russia’s Far East Amur region. According to announcements at the time, the RDIF and the PIF were also considering a US$300 million investment in NefteTransService, one of the largest Russian operators of railway rolling stock. Added to all of this was the creation of a Russia-Saudi Economic Committee that would identify and develop economic and trade ties as well as investments between Russia and Saudi Arabia across all sectors, co-chaired by RDIF chief executive officer, Kirill Dmitriev.

By Simon Watkins for Oilprice.com

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