Gambling in the time of the "Corona" .. Why would Saudi Arabia lose its oil war with Russia?

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The Saudi Crown Prince, Mohammed bin Salman, was housed in a quiet corner of the crowded hall that gathered the leaders of the G20 countries in the Argentine capital, Buenos Aires, on November 30, 2018. After all, only a few weeks had passed. On the heinous crime of the murder of journalist Jamal Khashoggi in the Kingdom’s consulate in Istanbul, and in light of the widespread belief that the Saudi crown prince was involved in one way or another in the crime; none of the world’s leaders wanted to venture by distorting his image by taking intimate photos with the Saudi prince in that The timing.

In light of this compulsory isolation, there was only one (1) person who had the audacity to challenge these overburdened atmosphere of suspicion and ostracism, to move to shake hands with Bin Salman warmly, take warm pictures with him and even take a seat right next to him, and that person was none other than Russian President Vladimir Putin "Whoever presented her time witnessed the embodiment of a warm and emerging relationship between two leaders whose country spent decades on two different sides of almost all the international divisions, but they finally succeeded in finding a common interest that brings them together, which is to maintain the stability of oil prices.

The “Saudi-Russian” understandings about oil began around the end of 2016, and the main objective of them was to coordinate oil production between the Organization of Petroleum Exporting Countries “led by Saudi Arabia,” and the oil exporters from outside OPEC, led by Russia, in order to restore the oil prices that It witnessed a significant decline since the second half of 2014 due to the abundance of supply and the recovery of the American shale oil industry, and these understandings culminated in an agreement to reduce production by 1.8 million barrels per day (OPEC bears 1.2 million barrels of which while Russia and the rest of the producers bear the remaining share), an agreement that succeeded in Double the price to spin in Levels range from 70 - 80 dollars for more than two years.

But this rise in oil prices soon proved to be not permanent, with the continued flow of hundreds of thousands of barrels of crude from unconventional oil producers, and slowing demand for oil in developing economies, especially in Asia, with the crisis created by the Corona virus, which caused prices to drop again. , And pushing Saudi Arabia to pressure Russia to make further reductions in production at the rate of an additional one million barrels, which Moscow rejected, and by the end of the first week of the current month of March it became clear that the talks between the two parties reached a dead end, and prices began to decline further .

While the markets were waiting for the Saudi reaction, Riyadh did not leave much room for guessing, and the day after the talks collapsed immediately, Saudi Arabia made a dramatic decision to provoke an aggressive price war, and announced its intention (2) to increase its oil production to the maximum, reaching 13 million Bpd, before the United Arab Emirates followed suit and announced its intention to increase its production by one million bpd, not only did the kingdom not only do so, but also decided to reduce the price of Saudi crude exports by 4 dollars to Asia, 7 dollars to the United States and 10 full dollars to the European markets Endodontic, and the increase in European markets specifically to try defining Riyadh crowding out Russian oil in the core markets and the largest increase possible grab for the benefit of the Kingdom's share market.

Within hours, (3) the oil markets responded with expected violence to the kingdom's reckless and unilateral actions, as crude prices fell to their lowest level in four years, and the markets witnessed the largest daily drop in the price of a barrel of oil since 1991, reaching nearly $ 30 a barrel, unlike the direct impact of the war. These prices are based on the performance of stocks on international stock exchanges that have witnessed unprecedented historical declines (4), including the Saudi local stock market index called "Tadawul", which lost 15% of its value in just two days, after Aramco shares fell by 10% to decline For the first time on the initial price of the offering, as well as a decline Shares of stock exchanges in Japan, Europe and even the United States.

The Saudi gamble was designed to bring a deep shake-up in the oil markets forcing Russia to return to the negotiating table again and surrender to the additional production cuts that Saudi Arabia wants, but as everyone expected except for Riyadh, Russia has shown no sign of backing down from its policies, and Putin stressed that he does not intend to Make any contacts with Saudi leaders to discuss oil prices, stressing that his country can coexist with the level of oil prices under $ 30 per barrel for a full ten years.

With each party stuck to its position, the oil markets entered into a long new game for "biting fingers" and waiting for the one to scream first, but the problem is that this game took place this time in a time that is very sensitive to the global economy in general and oil markets in particular, with increasing fears of a situation Global recession due to the outbreak of the extremely rapid Corona virus, and the bleak outlook (5) on the future of oil demand is expected to decline in 2020 compared to the previous year for only the third time in 35 years; in the midst of all this seems to be entering into a new price war a high-smart gamble Risks are not expected to harm only Russia's economy and the oil producing countries Khar OPEC, but it would hurt the Saudi oil-based economy in the first place, especially since the Kingdom need a high oil price ranges from around $ 85 to equalize in the budget, compared to Russia, which has sufficient price levels at only $ 40 to reach the break-even point.

Price wars

Saudi Arabia has a long history of using oil as a weapon, perhaps only, to undermine its opponents and achieve its political goals, but contrary to what Saudi officials often claim about the kingdom succeeding in achieving victory in all its oil wars, which is an incorrect claim by the way, these victories The hypothetical often came at a high price (6), led by the oil war that the Kingdom waged at the behest of the United States in the 1980s with the aim of undermining the Soviet Union, which led to a major price shock known in the oil circles as the "lost contract".

Over the next two decades "1990-2010", Saudi Arabia succeeded in overcoming the effects of the price shock and accumulating large financial surpluses due to the high oil prices, but these prosperity episodes reached their end in the second half of 2014 when Riyadh decided to launch a new price war, but this time with the goal Undermining American shale oil producers, after the then Saudi Oil Minister, Ali Al-Naimi, succeeded in persuading "OPEC" to increase oil pumping to reduce prices and remove American producers from the market, taking advantage of the ability of the Kingdom and "OPEC" countries to produce oil at very low costs compared to non-oil producers Traditionalists.

But the Saudi strategy soon proved to be short-sighted, as it failed to inflict strategic damage on the American shale oil industry, and it became quite clear that Riyadh had miscalculated the ability of the shale oil sector to reorganize itself, as most American operators demonstrated their ability to continue to work and even achieve Reasonable profits at price levels between 35-37 dollars a barrel.

The Saudi price war strategy proved to be more devastating to the economy of the Kingdom and its OPEC allies than it had done to harm US oil producers

Reuters

On the other side, the Saudi price war strategy proved that it was more devastating to the economy of the Kingdom and its OPEC allies than what had caused harm to American oil producers, as the final result (7) of the Saudi price war was the loss of the Kingdom and OPEC countries to approximately 450 billion dollars in oil revenue in The low price environment with the oil price tumbling below the level of $ 28 a barrel in early 2016, which caused the Saudi budget surplus to turn into a deficit of $ 98 billion in 2015 (the cumulative Saudi deficit between 2014 and 2019 is $ 385 billion), and the kingdom has squandered At least 250 billion dollars Encyclopedia of oil reserves during that period, as well as the recession resulting in stopped hundreds of local projects and do not reimburse the government for tens of billions of dollars owed to local contractors, pushing the kingdom to implement austerity unusual plans, a legacy of economic continues to weigh on the Saudis today.

The Saudi economic and political situation at that time was so bad in 2016 that the Saudi Deputy Minister of Economy Muhammad Al-Tuwaijri stated in an unprecedented criticism from a Saudi official of his country's policy that if Saudi Arabia does not take any reform measures, and if the global economy remains the same, then the The country went bankrupt within 4 years, and these fears ultimately prompted Saudi Arabia to change its oil policy by sacking Oil Minister Al-Naimi and appointing Khaled al-Falih, who began communicating with Russia to coordinate an agreement to cut production that doubled oil prices.

But the stage of Prince Abdulaziz bin Salman, the half-brother of the Saudi crown prince who replaced Khaled Al-Falih as oil minister last year, marked the beginning of the tense Kingdom’s oil relationship with Russia, as Riyadh began to criticize Moscow because of its failure to adhere to the cuts. Scheduled for production, as well as putting pressure on the Russians to accept additional cuts, which has led to severe tension in the relationship of oil interests existing between the two countries three years ago.

Otherwise, it was clear that Moscow began to feel restless (8) who evaded the kingdom from some of the promises it made to it with the first beginnings of cooperation between the two countries, including a promise that was not implemented in the billions of Saudi dollars as investments in the Russian economy to reduce the effects of US sanctions and also support the Kremlin's policies. In Syria, at a time when Riyadh felt unhappy with Russia’s rapprochement with Turkey, its current rival for the leadership of the region, the gap between the two countries widened at the political level in a way that the two parties were unable to maintain their economic cooperation, especially since Riyadh and Moscow were carrying different visions in some way About regulating the oil market. All of these factors ultimately caused the collapse of the "OPEC Plus" agreement, but the irony is that the kingdom, instead of trying to maintain the cuts within OPEC to prevent prices from collapsing, or even reproduce to its normal levels before the reduction, it chose to wage an all-out oil war by increasing Its production and price reduction at the same time against Russia.

The same error twice

Riyadh bets this time that its oil war will be rapid and lightning to achieve its political goals within a period not exceeding some weeks or months on the worst estimates, and the idea of ​​the Saudi war this time is that in a market crowded with supply, obtaining a greater market share by lowering prices may The strategy is most effective in the short term, by increasing the volume of exports from 7 million barrels to more than 9 million barrels per day or more; the Kingdom can reap the same amount it gets with high prices at lower price levels, while betting ( 9) Its opponents, Russia is defiant D, will not be able to withstand very low prices for a long time, and in the imagination of Saudi officials, that what will bring Moscow to the negotiating table run by Riyadh, this time on its own terms own.

But the assumption of success of this strategy today is much less than it was in 2014, as it appears that all the dynamics are playing against the Kingdom this time. On the one hand, it seems that most oil producers have become more adaptable to low levels of prices compared to 2014, which means they continue to pump, which will push prices to drop to a new identity that may reach the level of $ 20, and on the other hand, it appears that Saudi Arabia itself is less prepared to bear the price levels Low for a long time, compared to 2014 when the Kingdom had $ 737 billion in cash reserves when its price war started, which gave it real room to maneuver and maintain its currency peg to the dollar and cover the large budget deficit, the Kingdom today has S revolving around 500 billion dollars, and with the spending rate for the current country and current price levels, can Saudi Arabia to consume $ 150 billion of reserves to cover within one year deficit only, which could threaten its ability to maintain the riyal's peg to the dollar.

Otherwise, the Saudi budget data at the end of last year 2019 show that the size of the public debt of the Kingdom has increased to nearly 24% of GDP, although this figure is relatively low compared to global levels of government debt; it is considered high considering that the Kingdom did not have any sovereign debt. Before 2014, which means that Saudi Arabia may be forced to borrow at an accelerated pace as oil prices continue to decline, and given the decline in confidence in the Saudi economy as a result of the stagnation in oil prices and the unreasonable policies of the Crown Prince, the cost of servicing any new sovereign debt will be high.

On the other side, Moscow, the main opponent of the Saudi price war, seems well prepared to face a prolonged wave of price declines, as Russia designed its budget for 2020 at a price of about $ 45 only for Russian crude. Otherwise, Moscow has spent the past five years accumulating huge reserves Of foreign assets estimated today at about 570 billion dollars, including a huge sovereign wealth fund worth $ 150 billion, and it edited the price of the ruble to allow it to respond quickly to market prices, as well as its success in reducing the contribution of oil to the country's general budget to only a third.

These measures were the result of Moscow's bold decision to restructure its economy in 2015 in response to the stagnation hit by Western sanctions imposed on him because of Putin's annexation of Crimea in 2014 by military force, a comprehensive structure that reached Moscow's design of its own response to "shock scenarios" that could During which oil prices drop to levels of up to $ 10 a barrel. As a result, Moscow is unlikely to be the first to scream in the game of finger-biting oil with Saudi Arabia, especially as Russia, paradoxically, today has geopolitical reasons to keep oil prices relatively low.

For the time being, it is clear that Moscow is prepared to withstand some acceptable economic pain in order to harm Washington and deprive American shale oil producers of increasing their share in oil markets, as Russia (10) believes that the production vacuum left by OPEC Plus cuts is often carried out It is directly filled by American producers, at a time when the United States is paving the way for its producers by imposing sanctions on other producers such as Iran and Russia itself, those whose national oil company, Roosevelt, was subjected to US sanctions because of its cooperation with Venezuela, which was shown in statements " Igor Sechin "President An executive of "Rosneft" who is close to Putin before the Eurasian Economic Forum last October, in which he said that the increase of the US share in the oil market "is not achieved in most cases by economic means, but by political games that include the overthrow of other producers", stressing that one-fifth The world's oil production is subject to US sanctions.

New oil market

Even by condoning these factors collectively, it is certain that the new Saudi oil war would not have come at a worse time (11), in light of the ambiguity surrounding the prospects for oil demand in light of the spread of the Corona virus and expectations of demand contraction for the first time since the global financial crisis before More than a decade.

The biggest challenge remains that these massive shocks occur in an oil market that witnesses large and rapid structural changes (12). From the era of the First World War until almost the end of the eighties, oil producers (and even industries) had enough economic and political influence to control consumers, but this matter It has changed over the past two decades. With the abundance of production, the equation has changed and producers have become the ones that compete more for consumer satisfaction, meaning that market movement is mainly controlled by demand and not by supply.

The prolonged decline in prices is likely to undermine Putin's plan to boost infrastructure investment and increase social spending

Reuters

The world clearly recognized this fact during the 2008 global financial crisis that struck the shores of exporting countries in particular because of the low global demand for manufactured goods, and consequently the decrease in demand for raw materials and fuel, foremost of which is oil, a phenomenon that is likely to repeat itself more clearly with the expected recession. Coinciding with the Coruna virus.

In light of all this, it is not an exaggeration to say that the new Saudi oil war will inaugurate (13) a new era in the history of oil markets, as this is the first time that the price collapse will be the result of a continuous abundance of supply and a structural shock in demand at the same time, which is This means that the world may witness a new price bottom if the outbreak of the Corona virus continues in the coming months as expected, and the concomitant stagnation in industrial activity and stopping sea and air travel.

The depth of this bottom that prices will reach and the length of stay will also depend on the extent to which the producing countries want to go in their current strategies before they have to retreat. On the Saudi side, it appears that Riyadh has the ability to increase its production more than any other country and can also withdraw from the stored oil to increase its exports, but with prices continuing to decline for a long time, it is unlikely that the additional revenue to increase oil sales will be sufficient to cover an appropriate part of the deficit that The price gap will generate it, and what makes Saudi Arabia the first candidate to back down in this war.

On the other hand, Moscow appears to be a candidate to hold out for a longer period, though a prolonged drop in prices is likely to undermine Putin's plan to boost infrastructure investment and increase social spending, which could create domestic political problems that might compel Russia at some point to accept A compromise with Saudi Arabia, and on the last front it seems that US President Donald Trump will find himself a winner in all circumstances. On the one hand, the shale oil industry does not seem to be able to harm the American economy in the way that Moscow or Riyadh expects given the different structure of the economy and industry in the states United, and There is relatively little importance for the oil industry in the overall size of the American economy, and on the other hand, there are major political benefits that cannot be ignored for low oil prices for Trump in the election year, as it is estimated that every $ 10 a barrel’s price of crude oil means a decrease of 25% in the price of a gallon of gasoline, and with every single cent of the drop in gasoline more than a billion dollars a year is released for consumer spending, and this leaves Trump with one relatively limited challenge which is trying to tackle the effects of low oil prices on oil states like Texas and North Dakota.

By launching a new landmark about oil prices, it is clear that Saudi Arabia and Russia are engaging in a high-risk chicken game waiting for who will scream first, but as the global economy stands on the brink of a new wave of recession it is likely that the effects of this Saudi war and Russia will exceed the impact on the economy The entire world, as for the oil markets, it will rebalance itself as is usual, but this time at the expense of the producers, and the Saudis in particular, those who will discover - late - that shooting a bullet on your foot is much easier than trying to get it out of that foot.