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Has Russia Reached Its Limit In The Oil Price War?

When Vladimir Putin was given a dire forecast of the economy under the cloud of a crippling coronavirus pandemic and a sharp fall in global demand for petroleum, the Russian president was much less bullish about his country's prospects in a price war with oil-producing rival Saudi Arabia. "For our economy, yes definitely, this is a very serious challenge," Putin told Audit Chamber head Aleksei Kudrin on April 1, adding that the United States, which recently surpassed Russia and Saudi Arabia to become the world's largest oil producer, would also suffer.

It was a big step back from the line being floated just two weeks ago when, despite Russia's economic dependence on natural resources, Moscow engaged in a bit of chest-thumping about its chances in a price war, arguing that Russia was in a stronger position than its main competitors to ride it out.

But that was before the true impact of the coronavirus on the global economy was understood, and before Kudrin -- a former finance minister and trusted ally -- told Putin in a government meeting held by video that the Russian economy could decline this year by between 3 and 5 percent.

And that was a moderate outlook, according to Kudrin, who went on to warn that the situation could be as bad as the nearly 8 percent decline the country suffered in 2009 during the financial crisis.

When faced with slumping oil demand as the global economy suffered from the effects of the coronavirus pandemic, Riyadh's demands for output cuts were refused by fellow OPEC+ member Moscow. After walking away from the table, the Saudis instead took the surprising route of increasing oil output, causing the largest one-day drop in prices in nearly three decades.

Putin's comment is one sign that Russia, which always expressed openness to continue negotiations with Riyadh, may be keen on coming to an agreement. "Today's acknowledgement by Putin shows Russia is interested in the dialogue process and wants to go ahead with it," Rauf Mammadov, an energy analyst at the Middle East Institute in Washington, told RFE/RL on April 1.

High-Stakes Game

From the beginning, the price war has raised questions about who would cave first: Moscow, Riyadh, or U.S. production, which depends on shale-oil producers that have gained market share at the expense of Russia and Saudi Arabia but require higher oil prices to stay in business.

Russia is now preparing to ramp up spending to support millions of citizens and thousands of companies affected by quarantines and shutdowns. The Kremlin has thus far announced an increase of spending by $17.5 billion to counter the outbreak.

Related: $1 Oil: Saudi Arabia's Attempt To Crush U.S. Shale But according to Kudrin, the country may need to spend 5 percent of gross domestic product -- or about $70 billion -- to combat the impact of the coronavirus, which Russia has officially said has infected more than 3,500 people, but which skeptics suggest is a low-ball figure.

Those costs will be difficult to cover if oil prices are low -- but on April 2, the price of Russia's Urals crude blend fell below $11 a barrel, the lowest since Putin came to power two decades ago. The international benchmark Brent crude, meanwhile, was going for just over $26 a barrel on April 2, whereas Russia depends on a price of about $40 a barrel to balance its budget.

Russia as of March 20 had $551 billion in foreign-currency reserves at its disposal, although economists suggested that Putin would prefer not to tap into them. In just one week, however, those reserves had already fallen by $30 billion.

Even before Putin's government meeting, there were signs that Russia was having second thoughts about engaging in a price war with Riyadh, with Energy Minister Aleksandr Novak saying earlier on April 1 that Russia would not increase oil production in April, a reversal of earlier comments by officials.

Analysts have said that Saudi Crown Prince Muhammad bin Salman's surprise decision to increase oil production was intended to get Putin back to the negotiating table.

And there is reason to believe that the Saudis might not want to keep the price war going either. Like Russia, the sharp decline in the price and volume of oil threatens Saudi Arabia's aggressive spending programs aimed at lifting living standards and diversifying its economy.

But Riyadh needs a much higher Brent crude price to balance its budget, nearly $80 per barrel, analysts have said. And while Saudi Arabia has $480 billion in foreign-currency reserves to lean on, it has already announced $13 billion in spending to deal with the lower budget revenue.

"Despite the bravado that we have been hearing on both sides, this is not about who has the lowest cost of production and higher profitability. This is about funding budgets, and for both Russia and Saudi budget expansion has been significant in recent years," Chris Weafer, the co-founder of Macro Advisory in Moscow, told RFE/RL on March 28. "The reality is that both of them need a deal to put a better price support in place."

Trump Wants A Deal

The other oil-producing elephant in the room is the United States, which has seen its shale-oil producers suffer as a result of the price dispute.

U.S. President Donald Trump, who has called the price war "crazy," has been trying to accelerate talks between Russia and Saudi Arabia while members of Congress have been calling for sanctions and tariffs if they don’t find an agreement.

Related: An Oilman’s Plea To President Trump

Trump has said he recently spoke with the leaders of both countries and that Moscow and Riyadh were "going to get together" but he gave no further details. He expressed optimism on April 1 that an agreement was near.

"I think that Russia and Saudi Arabia, at some point, are going to make a deal in the not-too-distant future because it's very bad for Russia. It's very bad for Saudi Arabia," Trump said.

The U.S. president reiterated that hope on April 2, saying in a tweet that he expected Russia and Saudi Arabia to cut 10 million barrels a day, though it was unclear if he was referring just to the two countries or to OPEC+, the alliance of two dozen oil-producing states that Moscow and Riyadh lead. It was also unclear if U.S. companies would be involved in the output cut.

Just minutes after Trump's tweet, Saudi Arabia called for an emergency meeting of OPEC+ members.

Macro Advisory co-founder Weafer said he expected Moscow and Riyadh to find a short-term solution to their dispute that would get them through the crisis period.

The Middle East Institute's Mammadov suggested that Russia and Saudi Arabia could reach an agreement with other countries through the Group of 20 (G20) format, as it would offer both Putin and Prince Salman a way to claim victory. "It would eliminate the face-saving confrontation between Saudi Arabia and Russia because it's not about the old OPEC+ deal" that they fought over, he said.

Trump will meet with U.S. oil executives on April 3 to discuss measures to support the domestic market, including possible tariffs on oil imports from Russia and Saudi Arabia as well as American production cuts.

Analysts have said that Riyadh and Moscow will want to see U.S. producers share the burden of stabilizing the market by cutting supply.

By RFE/RL

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  • Mamdouh Salameh on April 03 2020 said:
    This article is so full of political bias and errors. Let me point them out.

    1-Russia hasn't reached its limit in the oil price war. By calling for an urgent meeting of OPEC+, to stabilize the global oil market and prices, Saudi Arabia has admitted the failure of its price war. Saudi Arabia used President Trump’s call to it to end the price war as a pretext to end it.

    2- Russia’s GDP was $4.35 trillion in 2019 or the 6th largest in the world based on purchasing power parity (PPP) which is the reliable yard stick both the World Bank and the International Monetary Fund (IMF) use to compare the economies of the world and not $1.40 trillion as mentioned in the article.

    3-All major economies of the world will suffer heavily from the atrocious impact of the coronavirus outbreak on the global economy. Russia is no exception.

    4- Russia has more financial reserves to sustain the price war than Saudi Arabia. Moreover. Its economy can live with an oil price of $25 a barrel for at least 10 years compared with $85-$91 for Saudi Arabia. Furthermore, its lifting costs per barrel at $2.5 is lower than Saudi Arabia’s at $2.8. Russia’s economy is one of the world’s most advanced economies and well diversified compared with Saudi Arabia’s overwhelming dependence on the oil revenues.

    5-Russia’s foreign-currency reserves couldn’t have fallen by $30 bn in one week as the article mentioned. In fact, based on a price fall from $45 to $25 and a 27% decline in Russian oil exports from 5.5 mbd before the outbreak to an estimated 4 mbd now, the loss would have been $560 million in a week or $29.2 bn in a year.

    6- If President Trump wants a deal to save the sinking US shale oil industry, he has to join OPEC+ efforts to stabilize the global oil market and prices by having the shale industry contribute a substantial production cut. The industry has gained market share at the expense of Russia and OPEC+ when prices were relatively high and it is only right that it should also share the pain of other oil-producing nations.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • Steven Conn on April 03 2020 said:
    At a time when US shale companies are reeling, burdened with debt and actually losing money to produce oil, Texas oilmen have sounded the alarm and began proposing cuts in production. Canadian oil sands are in a worse plight. Russia correctly expects falls in production from both of these sources by mid-late summer. Trump and US oilmen will have to join production cuts, and this will mean that the early-March ploy - to have OPEC+ cut production while US shale stood by and incurred no commitment - has fallen through. The three largest producers will all have to cut, which is what Moscow has lobbied. Following US production cuts, Canada and Mexico, in other words non-OPEC producers in North America, will have to take on greater responsibility, as will Norway possibly.

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