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Tim Daiss

Tim Daiss

I'm an oil markets analyst, journalist and author that has been working out of the Asia-Pacific region for 12 years. I’ve covered oil, energy markets…

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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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  • Mamdouh G Salameh on August 28 2018 said:
    Since the discovery of oil in Saudi Arabia eighty two years ago, the country has been synonymous with oil. But now the sands under which supposedly 16% of the global proven oil reserves lie are beginning to shift under the feet of its leaders.

    The country’s oil and foreign policies are in shambles. Saudi Arabia is currently embroiled in a crescent of conflicts involving Iran, Iraq, Syria, Yemen and now Qatar not to mention its uneasy relations with the United States.

    Former President Barak Obama tried to keep equidistance from both Iran and Saudi Arabia recognizing that both are major regional powers in the Gulf. This policy culminated in the signing of the Iran nuclear deal. Saudi Arabia distanced itself from that policy.

    Crown Prince and Defence Minister Prince Mohammed bin Salman is gambling on winning US support for the transformation of the Kingdom’s strategic fortunes.

    His commitment to invest up to $350 bn in the United States is part of a policy to win back the US as an ally.

    However, it is a high-risk gamble. Any Saudi investment in the US could be at risk by the legislation passed by the US Senate and the US House of Representatives in May 2016 that would allow families of September 11 victims to sue the Saudi government for damages. The law removes the sovereign immunity, preventing lawsuits against countries whose citizens were found to be involved in the attacks. The minute one law case is launched by an American citizen against the Saudi government, all Saudi assets in the US will be frozen. That is one major reason why the IPO of Saudi Aramco was withdrawn altogether. The other reason is question marks about Saudi proven oil reserves.

    Saudi Arabia vehemently supported President Trump’s walking away from the Iranian nuclear deal. Still, the United States is not the solution to the Saudi geopolitical and economic problems. It is part of the problem. Since the discovery of oil in Saudi Arabia, the Saudis appeased the Americans by satisfying their addition to oil, financing their wars and doing their bidding. Moreover, the law relating to the 9/11 victims seeking compensation from the Saudi government will be hanging like a Democles’ sword over their necks. It could be invoked anytime to blackmail the Saudis in the future.

    And while Saudi-Russian relations have warmed up considerably through coordinating their oil policies as manifested by King Salman’s visit to Russia as the first ever Saudi Monarch to visit Moscow and the invitation to President Putin to visit Riyadh, the relation between the two countries are tactical.

    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. And it was Russia who cooperated with Saudi Arabia to reach the OPEC/non-OPEC production cut agreement to bolster the oil prices.

    The Saudis see some strategic advantages from cooperation with Russia. Both account from 26% and 25% of global oil production and exports respectively. Both face the threat of US shale oil production and both can cooperate to control global oil markets. Moreover, Russia’s close relationship with Iran could help reduce tension between Iran and Saudi Arabia. As for Syria, with Bashar al Assad getting the upper hand, the Saudis may have to accept the Russian fait accompli there. The Saudis would have noted how Russia staunchly supported its ally Syria against overwhelming odds. Saudi Arabia may be coming to realize that the US will never go to that extent in supporting it in a time of need unless there is US national benefit to it.

    On balance, Saudi Arabia feels tempted to get closer to the Russian-Chinese strategic partnership not only because of the petro-yuan but also because this partnership is increasingly shaping the global economy and geopolitics. The Saudis may eventually realize that their relationship with the United States over the years has only brought them trouble.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London

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