Virus Onslaught Deepens Gulf Disquiet Over Saudi Oil-Price War
(Bloomberg) -- Saudi Arabia’s oil-price war with fellow exporting giant Russia bewildered the kingdom’s Gulf allies, unexpectedly shattering their fiscal defenses just when they’re most needed to combat the coronavirus.
The United Arab Emirates and Kuwait, along with smaller neighbors, want a return to talks among the OPEC+ cabal of oil powers but the central protagonists, including Crown Prince Mohammed bin Salman, are digging in.
As the pandemic shuts down major chunks of the global economy, that posture is helping to drive oil even lower, to below $10 in the physical market, sharply curtailing fire-power in Gulf economies still struggling to recover from the last oil price plunge in 2014.
Three officials with a deep knowledge of oil policy in the region, as well as industry insiders, described the Saudi decision early this month to cut prices and lift production as Saudi-driven and unnerving for its partners, who felt compelled to fall in line and have had to push the issue to one side as they focus on the wider problems posed by the virus.
The longer the standoff between Saudi Arabia and Russia persists, however, the more strain it could put on the Gulf’s broader foreign policy efforts that come with their own, sometimes hefty, costs. Saudi Arabia and its Arab neighbors have closely linked strategies toward containing fellow OPEC member Iran -- encouraged by Washington.
“This was a Saudi-first, Saudi-only move,” said Barbara Leaf, a former U.S. ambassador to the U.A.E., describing the dispute as highly disruptive to other Gulf producers. “The Emiratis have aligned themselves with Riyadh and topped up the volume -- they closed ranks. But I can’t imagine they think an open-ended price war with Moscow is the best course of action.”
Turning Up Volumes
The U.A.E., which prides itself on being a stable, predictable oil supplier, is especially concerned about the disorder the price war brought to the market, but tends to refrain from airing disagreement with its larger partner in public. An Abu-Dhabi based diplomat said the U.A.E. would not divert from its energy partnership with Saudi Arabia. Even so, U.A.E Energy Minister Souhail Al Mazrouei struck a more conciliatory tone than Saudi Arabia after the breakdown of oil talks in Vienna.
“We are hoping that our friends from Russia need more time to think about it and maybe come back and meet anytime, we could meet anytime,” he said on March 6.
Abu Dhabi worked hard behind the scenes in the immediate aftermath of the meeting to bridge the gap between Riyadh and Moscow and restore stability, according to people familiar with the matter. It is “maximizing efforts to try to drive everybody back to the table”, said Leaf. So far, there’s little indication its pressure will bring rapid results.
Under its de facto leader Prince Mohammed, Saudi Arabia says it’s comfortable with oil around $30 a barrel, and has indicated it will seek to maximize the financial pain felt in the Kremlin -- despite already having had to slash this year’s planned spending by $13 billion. That’s feeding oil market suspicions that that the kingdom has embarked on a policy to structurally weaken competitors as the climate crisis forces an energy revolution.
Russia and Saudi Arabia were the architects of a cooperation deal in 2016 to end a slump in oil prices, and it met with initial success. Over time, the alliance became increasingly unbalanced as the Saudis took on a greater share of output curbs and Russia flouted its obligations. Tensions came to a head as Moscow refused Saudi requests for greater production cuts to prop up oil prices during the virus pandemic.
Government officials weren’t immediately available to publicly comment in the U.A.E. and Kuwait for this story. U.A.E. Energy Minister Suhail Al Mazrouei said in a tweet that his country believes that a “new agreement is essential to support a balanced and less volatile market.”
The impact of sharply lower crude will be felt hardest in countries like Bahrain and OPEC’s No. 2 producer Iraq, where governments have smaller financial reserves, and in the case of Baghdad, a massive reconstruction bill following the war with Islamic State. But even more affluent countries in the U.S-allied region are having to find resources to plot their way through an economic storm that was ill-timed and largely avoidable.
The U.A.E. and Kuwait need an oil price of $70 and $54.7 a barrel respectively to break even fiscally in 2020, according to International Monetary Fund projections. Together with neighbors they are now unleashing stimulus worth billions of dollars for economies that never truly recovered from 2014’s slump in oil prices.
The United Arab Emirates has unveiled a stimulus package worth some $34 billion to fend off the economic impact of coronavirus but its position as both a major crude exporter and a global trade and travel hub means its economy is particularly vulnerable to airline and shipping disruptions wrought by the coronavirus. Non-oil growth in 2019 is expected to have grown just 1.1.% last year, down from 1.3.% a year earlier, and concerns were already growing that malls and real estate in Dubai were becoming oversupplied.
It’s unlikely other Gulf OPEC members can make up for lost revenue by selling more oil, said Kamel Harami, an independent oil analyst and former executive of state-owned Kuwait Petroleum Corp. “The market is already saturated. And Saudi will grab any available opportunities to send additional crude at the expense of OPEC countries,” he said.
The kingdom’s bid to win market share could end up angering allies further afield. In the U.S., where shale oil producers championed by President Donald Trump are especially vulnerable to cheap oil, nine senators called for an investigation into what they described as the “excessive dumping” of crude into the market by Russia and Saudi Arabia. Trump spoke with Prince Mohammed by phone before the Saudi leader escalated the price war, according to the White House, although it wasn’t clear if the two discussed Saudi plans.
This week, the U.S. made its most direct intervention yet in the oil price war between Saudi Arabia and Russia, with Secretary of State Michael Pompeo urging Prince Mohammed to “rise to the occasion and reassure” energy markets at a time of economic uncertainty.
The Saudi move will likely reignite concern among some in the U.S. Congress who have attacked the Saudi prince over the killing of Saudi dissident and Washington Post columnist Jamal Khashoggi and the kingdom’s war in Yemen.
“I don’t think anyone expected the Saudis to respond quite like this,” said Matthew Reed, vice president of Washington-based consulting firm Foreign Reports, which focuses on how developments in the Middle East affect oil markets. “The longer this drags on, however, the more relations will be strained.”
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