"Russia has had enough of the shale guys living off OPEC plus" and "has been riled by recent US sanctions on Rosneft and Nord Stream 2"
“When Saudi Arabia wanted a rapid response to the coronavirus outbreak last month, King Salman himself made a call to President Vladimir Putin to gain his endorsement — to no avail.”
Just as the coronavirus outbreak wreaks havoc on the oil market, Russia has spotted an opportunity to hurt rivals in the US shale patch. Moscow’s partners in Opec now are collateral damage, and a price-sapping war for market share may follow.
The three-year partnership that joined geopolitical rivals and halted the biggest crude price crash in a generation hit the buffers on Friday when Saudi Arabia-led Opec and Russia failed to agree on deeper production cuts in response to the spread of the coronavirus that has hit the global economy and its demand for oil.
Russia’s view that rival North American producers would gain most from new efforts to prop up prices killed the deal, said people familiar with the negotiations. Saudi Arabia, unwilling to take on more cuts without Russia as a partner, is readying itself for another stand-off with US shale.
On Saturday the kingdom slashed the official selling prices of its crude to the US, Europe and Asia by as much as $8 a barrel, according to an official list seen by the FT, firing the first shot in what looks likely to be a brutal price war. The Saudi price cuts are among the largest in history.
Brent crude, down about 30 per cent since January, slumped a further 9 per cent to $45 a barrel on Friday after Russian energy minister Alexander Novak said producers would soon be able to pump at will, ending three years of supply cuts designed to support prices.
“Of course, if there is no agreement, Saudi Arabia will produce whatever the customer asks for,” said one Opec delegate. When asked if countries were entering into a fight over market share, he said: “It could be.”
The impact on the oil price from the collapse of the Vienna negotiations could be severe, said analysts, with some predicting a drop to below $30 a barrel.
“This has all the hallmarks of a price war, the only thing missing is the smell of gunpowder,” said Jamie Webster, senior director at BCG’s Center for Energy Impact.
Russia is not a member of Opec but now holds huge sway over oil policy after joining the cartel in making production cuts three years ago.
But Moscow’s refusal to agree deeper cuts was a deal-breaker this week, demolishing a Saudi plan to increase their size and prolong the curbs until the year-end. The kingdom’s plan was conditional on all players taking part: Russia baulked.
It wanted more time to assess the impact of the virus on demand, said officials in Vienna. But Moscow also eyed an opportunity to damage rival US shale producers and the wider American economy, said three people familiar with the discussions in Vienna.
“Russia has had enough of the shale guys living off Opec-plus,” said one person familiar with negotiations, referring to the cartel and allied non-members.
The Kremlin has also been riled by recent US sanctions on the trading arm of Russian energy major Rosneft and Nord Stream 2, the proposed new gas pipeline between Russia and Europe, said two people familiar with the Vienna talks.
A steeper drop in crude prices will cause widespread pain in the American oil industry, said analysts.
“At a time when shale producers face much tighter capital constraints to keep up output, a price war may push US oil companies already at risk of bankruptcy over the edge,” said Jason Bordoff, head of Columbia University’s Center for Global Energy Policy.
The collapse of the negotiations in Vienna underscored the extent to which Russia has taken charge over Opec decision-making despite a new push by Abdulaziz bin Salman, Saudi Arabia’s oil minister, to reassert the kingdom’s authority over the group.
Privately, government officials and oil executives in the kingdom see the benefits — as a low-cost producer — of taking on US shale companies which require higher oil prices to stay profitable. While that indirectly might appease president Donald Trump, who wants to keep gasoline prices in check, Saudi Arabia primarily seeks to protect its own economy.
The sharp price fall after the meeting will trigger memories of the oil crash of 2014 which wrought turmoil across international financial markets, battered the budgets of producer economies and crippled the balance sheets of some energy companies.
Prices collapsed to below $30 a barrel in January 2016, prompting the kingdom to do what was once unthinkable and form a production-cutting alliance with Russia and its Opec peers later that year.
Riyadh and Moscow’s collaboration — backed by the countries’ highest authorities — was more far-reaching. They engaged in talks about corporate tie-ups and cross-border investments. They also became closer on foreign policy despite backing opposing groups in Syria.
It was cemented by the visible personal bond between Mr Novak and his then-counterpart in Saudi Arabia, Khalid al-Falih, who was ousted from his post as energy minister last year in favour of the king’s son.
“They don’t hate each other,” said one Opec official of current relations between Prince Abdulaziz and Mr Novak. “But it’s not the same relationship as with Falih. There was a bromance and chemistry. There’s no chemistry now.”
In January 2018, Mr Falih said the alliance would last for “decades and generations”.
But in recent months, it has seemed as if two of the world’s biggest oil producers were not working from the same playbook.
When Saudi Arabia wanted a rapid response to the coronavirus outbreak last month, King Salman himself made a call to President Vladimir Putin to gain his endorsement — to no avail.
As forecasts for oil demand growth this year weakened, an advisory committee to Opec and Russia initially signalled that additional cuts of 600,000 b/d would be necessary to stem oil price declines. That figure steadily increased to 1.5m b/d this week, reflecting the worsening global coronavirus conditions. This would have taken total cuts to 3.6m b/d.
“The Russians had a very strange view of the market,” said a person familiar with the negotiations. “All through the meeting they said, ‘let’s wait and see, let’s wait and see’ — and said prices had already declined as far as they would decline.”
Then it became clear that Russia had the US in its sights.
As frustration mounted, it was left to the Azerbaijani energy minister to make the final efforts late on Friday to broker some kind of deal between Mr Novak and Prince Abdulaziz. He failed.
Opec officials maintain that the group of producers ultimately has a responsibility to stabilise the oil market. “The point is to not allow commercial stockpiles to build”, said the Opec delegate. “[But] this was not everyone’s opinion,” he said of Russia’s reluctance.
The end of the meeting, said one official who was present, “felt like a wake”.