Why did Russia Feel the Proposed Cuts Wouldn’t Work?
IndraStra Global

Why did Russia Feel the Proposed Cuts Wouldn’t Work?

An Energy Industry Insight by The Abdullah Bin Hamad Al-Attiyah International Foundation for Energy & Sustainable Development, Qatar

An Energy Industry Insight by The Abdullah Bin Hamad Al-Attiyah International Foundation for Energy & Sustainable Development, Qatar

In the weeks since the price war began between Saudi Arabia and Russia, oil prices have plunged to their lowest levels in decades, pounding economies on the way down. Yet as the global economy feels the strain on commodity markets, experts suggest there is more to come, which will likely produce a large number of losers, but no winner.  

Saudi Arabia and Russia became locked in a war for global oil market share after their deal to limit output broke down at the start of March 2020. With global oil demand plummeting due to the current COVID-19 pandemic, OPEC suggested to deepen its already agreed supply cuts, however, Russia said it would only agree to extend the agreement timeline, stating that deeper reductions in production would not work. 

OPEC had proposed to extend cuts by an additional 1.5 million barrels per day (bpd), with Russia to contribute an extra 300,000 bpd to the reduction, however, Pavel Sorokin, Russia’s Deputy Energy Minister, said the task would be “technically challenging.” The proposed reduction in supply would double Russia’s overall contribution to a 600,000-bpd cutback. Sorokin added that such a cut was pointless until there was a full understanding of how sharply demand could fall.

“We cannot fight a falling demand situation when there is no clarity about where the bottom (of demand) is,” Sorokin said in an interview with Reuters. He expanded further on Moscow’s view of the situation, stating: “It is very easy to get caught in a circle when, by cutting once, you get into an even worse situation in say two weeks,” highlighting that oil prices may shortly bounce back before falling again, as demand continued to fall. 

In a counter-proposal, Russia had suggested extending the existing OPEC and allies agreed supply reductions for at least another quarter, in an attempt to assess the real impact on demand from the global pandemic. However, OPEC declined the Russian counter-proposal, and in what seems like retaliation, the cartel removed all restrictions as of April 1st, allowing all member producers to pump freely. Saudi Arabia is now declaring to raise production to a record 12.3 million barrels per day.

In response, Russia’s Oil Minister, Alexander Novak, said Moscow could potentially increase output by 300,000 b/d in a very short period and indicated that Russia could balance its finances at around $40/b. Furthermore, the country has a greater diversity in its economy, with huge exports of other raw materials, that provide Russia with an economic cushion that Saudi Arabia doesn’t have.

Moscow has also made it clear, that cuts from only OPEC members and its allies will simply not be enough to balance markets, suggesting that other countries, including the U.S., need to buy into such a pact. A recent Reuters report stated that Kirill Dmitriev, the Head of Russian Direct Investment Fund, indicated that a new OPEC+ deal was only possible if other countries were involved.

Some experts believe Moscow’s target was always the United States and its shale industry, whose oil production has soared since Russia and Saudi Arabia agreed to collaborate on production cuts in 2016.

This indirect strategy has already forced Washington into the fray, as they announced that an envoy would shortly head to Saudi Arabia to deal with the fallout, and President Trump picks up the phone to President Putin. In a new twist in global oil diplomacy, the two Presidents agreed during the phone call on Monday to have their top energy officials discuss slumping global oil markets, as Trump labeled the price war as "crazy." White House spokesman Judd Deere said the two leaders had agreed on the importance of stability in global energy markets.

Saudi Arabia, on the other hand, is gambling that their increased output will mitigate the financial impact of the plummeting prices, increase its market share and bring Moscow back to the table.



However, as of last week, Saudi Arabia announced it was not yet in talks with Russia to balance oil markets, despite weighing pressure from Washington and reports that Moscow had already made some attempts to repair ties with the de facto OPEC leader. At this point, it seems clear that Russia is keen to return to the table, but only if the U.S. is included, as Saudi Arabia struggles to maintain control.

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