Will Saudi Arabia's Geopolitical Strategy Backfire?

Russian Deputy Foreign Minister Mikhail Bogdanov said on Friday that Vladimir Putin is preparing to visit Saudi Arabia. The statement comes after the Russian president received an invitation from Saudi King Salman at an unspecified time, according to reports. Bogdanov added that the visit is pending on Putin's schedule.

King Salman became the first Saudi monarch to visit Russia last October, meeting Putin in the Kremlin. The disclosure on Friday also comes just months after Saudi Crown Prince Mohammed bin Salmon visited Moscow to attend the opening of the 2018 World Cup. He also meets with Putin during this visit.

While Bogdanov declined to disclose what the talks would be about, it's apparent that global oil markets will be on the top of the agenda as will developments in Syria (where Moscow and Riyadh are on opposing sides in the ongoing Syrian Civil War), as well as talk about fresh U.S. sanctions on Iran that could remove, according to many estimates, up to 1 million barrels per day of oil from global markets.

It was Russia that came to the aid of Saudi Arabia after the kingdom had for all practical purposes lost its decades long ability to play global oil markets swing producer as U.S. shale oil production revolutionized markets.

As a refresher, in late 2014 the Saudis responded to increased U.S. production by trying, unsuccessfully, to protect their market share by not trimming production as it had often done in the past but opening the output spigots to try to force U.S. shale producers out of business, an allegation the kingdom vehemently denies to this day. Related: Poll: Oil To Remain At Current Prices In 2018

While the plunge in global oil prices that followed pushed nearly all U.S. producers to pump well below their break-even points, forcing them out of business, others survived, and effectively lowered production costs even more, rendering the Saudi attempt ineffective.

By 2015, the Saudis were swimming in debt and were forced to enact politically unpopular austerity measures. They finally turned to unprecedented fund raising through the issuing of international bonds, therefore had little choice but to form a coalition with non-OPEC producers, led by Russia. In essence, what Saudi Arabia did for years in oil markets it could no longer do without Russian help, a geopolitically weakened position for the Saudis.

In early 2016, OPEC and non-OPEC partners started to trim production, eventually reducing OECD oil inventory levels to five-year averages and forcing oil prices back up. The new floor under oil prices has allowed Saudi Arabia to regain much of its oil markets swagger and start to refill coffers drained by the multi-year roil in global oil prices.

A rebound in prices has also allowed Riyadh to put on hold its much hyped IPO for national oil company Aramco. People familiar with the matter told Bloomberg last week that the postponement doesn't mean a permanent cancellation, but at the end of the day it remains to be seen if the IPO will ever be resuscitated.

Saudis may be forced with a hard decision

Earlier this year, there was talk about a more permanent, 10 or even 20-year, Saudi-Russian oil production agreement, bin Salman told Reuters news agency.

What remains to be seen however, in spite of the successful recent Saudi-Russian agreement to take back control of global oil markets, is whether or not a permanent so-called expanded OPEC, non-OPEC cartel would even work long term. While both countries seem to be putting aside stark differences over Syria (where Russia supports the country's embattled president Bashar al-Assad, while Saudi Arabia, along with Qatar and Turkey, support the Syrian rebels) it has nonetheless strained relations. Russia and Saudi Arabia also have differences over how to handle Iran's nuclear power development ambitions. Related: Experts: Norway Should Stick With Oil

It's these very geopolitically dangerous quagmires that could cause the fledgling Saudi-Russian relationship to eventually fall apart or at least become weakened.

The growing friendship between Russia and Saudi Arabia also comes, perhaps ironically, as U.S.-Saudi relations reach a decades-long high-water mark, largely orchestrated by both Washington's and Riyadh's distain for Iranian hegemony ambitions in the middle east, including its controversial nuclear development program.

Most agree that it was the Saudis that were in large part instrumental in convincing Trump in May to reimpose sanctions on Iran. However, that job might not have been too difficult since Trump campaigned in 2016 in large part on an anti-Iranian nuclear accord platform. During his 2016 campaign, Trump also ratcheted up tensions with Saudi Arabia over oil production, middle eastern security problems and other issues - all conveniently forgotten now two years later.

Now that Russia and the U.S. are gearing up to enter a new phase in Syria in what media has recently called using their local representatives in a final push to defeat militant groups on opposing sides, the Saudis might have to make a hard decision over its relations with Washington and Moscow.

While it's not likely that Riyadh would want to willingly damage relations with either side, at the end of the day it may have to nonetheless choose to favor one over the other. If so, history is on the side of the U.S.-Saudi relationship, while historically Russian-Saudi relations have been strained. On the other hand, the Saudis have never been in a position where it's influence in global oil markets thus its financial well-being was dependent on another oil producing country - in this case Russia.

By Tim Daiss for Oilprice.com

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