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by John Helmer, Moscow

Russia is not the initiator of the war on the oil front which is now under way. Not Russian Energy Minister, Alexander Novak (lead image, right), but Mohammed Bin Salman (left), the Saudi Crown Prince and chief executive of the sheikhdom.

This is war propaganda from the Financial Times : “ ‘There was a consensus among Opec [to cut production]. Russia objected and has said that from April 1 everyone can produce whatever they like. So the kingdom too is exercising its right,’ said one person familiar with Saudi oil policy.”

This is more lying from the New York Times: “Moscow refused to accept production cuts to offset the effect of the coronavirus outbreak”

What is true is that the war started with the US Government; its spetsnaz, the shale oil producers;  and their offensive to capture  market share from the traditional producers, the member states of the Organisation of Petroleum Exporting Countries led by Saudi Arabia, plus Russia (OPEC+). Pressing this attack when oil demand started falling, as the corona virus damaged the global economy, obliged the defenders to agree between themselves on tactics. The Russians argued for holding the current position, and let the virus, the demand dynamic, and the elapse of time damage the Americans. The Saudis argued for a break-out, a counter-offensive. Between lower-risk defence in place, and a higher-risk sally, it’s impossible to do both at the same time. Three things happened next.

They illustrate the lesson the Russian command will now teach Mohammad Bin Salman, as last week’s lesson was taught on the Syrian war front to Tayyip Recep Erdogan, Turkey’s President. Defence in depth will usually defeat offence, even surprise attack, when it runs beyond the lines of supply and reserve.

According to Russian sources, including Rosneft, the Saudis have long wanted to put a stop to the US shale oil threat to the market. But for now, in their briefings for the western media, Riyadh doesn’t mind if Russia takes the blame for the counter-attack on US shale oil. Thus, the conservative defender is blamed for the impetuosity of the attacker.

Officially, President Vladimir Putin discussed the Saudi thinking on February 3. That’s when Bin Salman and his father telephoned the Kremlin.

Source: http://en.kremlin.ru/

Officially, they “discussed in detail the current situation on the global hydrocarbons market and confirmed their willingness to further coordinate their actions in the OPEC+ format to ensure stability on the global oil market. It was agreed to maintain contact at various levels.”

Contact proceeded; coordination broke down. The only other Arab leader Putin has talked to was the Syrian President Bashar Al-Assad on March 6.  Putin, who initiated that telephone call, discussed the Syrian war front and what had happened in the negotiations with Erdogan two days before. Read the details here.  


Source: http://en.kremlin.ru/

Novak got fresh running orders at an unusual meeting held at a Moscow airport on March 1. As the left picture shows, on Putin’s left sat Novak; Elvira Nabiullina, Chairman of the Central Bank; and on the far right of the frame, Igor Sechin, head of Rosneft. On the opposite side of the table sat the chief economic and financial policy-making ministers and Kremlin advisors, plus the chief executive of Surgutneftegaz, Vladimir Bogdanov.

Referring explicitly to the OPEC+ negotiations to come in Vienna, Putin said “we must be prepared for all possible scenarios. I want to stress – the current oil prices are acceptable for the Russian budget and our economy. Let me remind you that our macroeconomic policy this year is based on a Brent crude oil price of $42.4 per barrel. Moreover, our accumulated assets, including the National Welfare Fund, are sufficient to ensure a stable situation and that all budget and social commitments are met even if the situation in the global economy deteriorates.”

“I wanted to hold this meeting,” Putin added, “in order to discuss this situation with you and hear your opinions on identifying further steps necessary to balance the global hydrocarbon markets.” The Kremlin disclosure stopped after the reference to “steps necessary to balance the global hydrocarbon markets.”

Four days later, at the first session of the OPEC delegations in Vienna on March 5, the Russian position was not to rush into fresh output cuts but preserve the existing production limits decided  last December; wait on the development of the corona virus problem and measure the reaction of oil demand: in short, delay the introduction of fresh oil output cuts as proposed by Saudi Arabia on its projection of the supply-demand balance by June.

The March 5 OPEC communiqué appeared to say just that.  “In view of the current fundamentals and the consensus on market perspectives, the Conference decided to recommend to the 8th OPEC and non-OPEC Ministerial Meeting to extend the adjustment levels agreed at the 177th Meeting of the Conference [December 5, 2019] and the 7th OPEC and non-OPEC Ministerial Meeting [December 6, 2019] for the remainder of the year.” This meant agreement on holding oil supply unchanged, and obliging the producers to stick to the previously agreed limit.

But OPEC, at Saudi insistence, added: “It also agreed to recommend to the 8th OPEC and non-OPEC Ministerial Meeting [scheduled for March 6] a further adjustment of 1.5 mb/d until 30 June 2020 to be applied pro-rata between OPEC (1.0 mb/d) and non-OPEC producing countries (0.5 mb/d) participating in the Declaration of Cooperation.”


The next day, March 6, the recommendation for the fresh supply cut — the “further adjustment of 1.5 mb/d until 30 June 2020” — was not agreed. Novak, the Russian representative at the session, explained what happened in his briefing at the prime ministry in Moscow on March 9.   “Following the meeting of OPEC ministers on March 6 in Vienna there is no decision to extend the current agreement on production reduction. The Russian side proposed to extend the agreement on current terms at least until the end of the second quarter in order to better understand the situation with the impact of coronavirus on the world economy and oil demand. Despite this, the OPEC partners decided to increase oil production and fight for market share.”

“[Novak] stressed that the scenario of withdrawal from the agreement to limit production was worked out and the current situation in the oil market is within the forecast. ‘The Russian oil industry has a high-quality resource base and sufficient reserve of financial strength to remain competitive at any projected price level, as well as to maintain its market share. At the same time, the Government will pay special attention to the stable supply of oil products to the domestic market and the preservation of investment potential in the sector,’the Minister of Energy said.”

The third thing to happen, agreed in advance at the Vnukovo meeting on March 1, was the devaluation of the rouble in tandem with the decline of the oil price.

It is not correct that on March 6 in Vienna,  Russia “effectively fired the first shot in what looks like being an expensive and prolonged oil price war.” In timing, the Russian shot was the third.

Chris Weafer’s assessment is correct that the shooting had started much earlier. “This looks like a battle between Russia and Saudi over oil policy. But the context of the relentless rise in US oil production over the past ten years is also an important factor. Both Russia and the major OPEC producers have been openly annoyed with the refusal of the US producers to participate in past production cuts and the fact that the US industry has been the major beneficiary of the price support mechanisms. It is a stretch to say that Moscow and Riyadh are in any sort of cooperation to try and reduce US oil production; the body language at the Vienna meeting strongly suggests otherwise. But if a price war results in some US casualties and a greater reluctance by investors and lenders to fund future US marginal production, then Moscow and OPEC will be relieved.”

Weafer’s market-share calculation is also Rosneft’s. “US market share has risen from under 9% to over 17% in the period [2008-2020]. Saudi and Russia market shares have held steady in this period mainly because of the US sanctions against Iran and Venezuela and disruptions in Libya and Nigeria, all of which have removed at least 4mn bbl/d from the global market.”


Source: https://intellinews.com/

Sources in Moscow explain that by devaluing the rouble at the same time as the oil price goes down, the Russian oil companies can (will) preserve a profit margin at a lower benchmark price that is far superior to the Saudi result. Right now, Sechin and Bogdanov have convinced Putin, the waiting strategy will work against Bin Salman. Comments Weafer: “Saudi Arabia reportedly needs $85 per barrel to balance its budget and does not gain from a currency offset as the riyal is pegged to the dollar. “We’ll see how he [Bin Salman] copes with the stress,” comments a Russian oil executive.

Another Moscow source comments: “The last Russian to deal effectively with the Arabs was Yevgeny Primakov, and he’s dead [2015]. The General Staff have proved as good in Syria. Putin is learning in Syria not to give up the fruits of victory.” On the oil front, between  the February 3 call to Bin Salman and Novak’s last bid on March 6, “watch the eyes, not the lips — the Russians decided not to blink.”

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