Saudi Arabia tries shock tactic to end oil conflict with Russia : The Standard

• Reuters 11th Mar 2020 00:00:00 GMT +0300

Saudi Arabia has escalated its oil market conflict with Russia in an attempt to force Russia back to negotiations or compel the United States to intervene and help broker a new agreement.  Saudi Arabian Oil Company (Aramco) has said it will lift the volume of oil supplied to the market to 12.3 million barrels per day (bpd) next month, which is more than two million bpd above its current output and 300,000 bpd above its sustainable capacity. Increasing supply rapidly by withdrawing oil from inventories and announcing it publicly is intended to maximise downward pressure on prices and the pain felt by all oil producers. It suggests Saudi Arabia is anxious to bring the conflict to a swift resolution and avoid a prolonged volume war that could cripple the country’s economy and jeopardise its economic modernisation programme.

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The aim is to force Russia back to the negotiating table or compel the United States to intervene and push for negotiations to restart so it can protect vulnerable US shale producers. Nuclear war-fighting strategies in the late-20th century developed a similar theory about escalating-to-negotiate. Rather than a full-scale nuclear exchange, the idea was that the detonation of one or two warheads aimed at carefully selected targets could relieve tensions, enable both sides to demonstrate resolve, and shock them into restarting diplomacy.

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Saudi Arabia’s decision to go for rapid escalation suggests the kingdom wants a quick resolution and a return to higher prices rather than a prolonged volume war with a long period of low prices. The kingdom is unlikely to want the kind of drawn-out production battle it fought from mid-2014 to the end of 2016, which burned through the kingdom’s cash reserves and pushed its economy into recession.

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But Riyadh’s bid to focus minds in Moscow and Washington also runs the risk that any of the three major players could misjudge the resolve of the others or their willingness to absorb short-term pain to pursue long-term objectives. Saudi Arabia’s previous volume wars, such as those launched by oil ministers Zaki Yamani in 1985/86 and Ali Naimi from 2014 to 2016, have often lasted longer and proved more painful than expected. Neither of those two standoffs brought a lasting peace with rival producers. Both ended with the scapegoating and dismissal of the sitting Saudi ministers. Critically, it is not clear what a new truce and market management agreement between Saudi Arabia and Russia, and implicitly also with US shale producers, would look like.

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Saudi ArabiaRussiaOil market conflict