Oil price truce: The Russia-Saudi standoff is over. But at what cost?

The Saudi-initiated oil price war that devastated the global industry for five weeks was the result of Russian and Saudi miscalculations that created such animosity that the very survival of their energy and geopolitical partnership was at stake.       

Russia had no clue that the Saudi reaction to its refusal to participate in a new OPEC+ output-cut agreement set for 6 March would be as swift or savage as it was.   

The Saudis' miscalculation was not realising that the coronavirus' crushing of global demand would magnify the oil price war's effects, hurtling prices toward the bottom.    

Within five weeks, both sides were looking for a way out, which US President Donald Trump supplied by intervening to broker a compromise. A new OPEC+ agreement was finally struck on 12 April on terms far less favourable to either Saudi Arabia or Russia than a 6 March deal would have delivered.  

The two antagonists had a lot riding on a solution. It was not only critical to the fate of the international oil industry, but also to whether Riyadh and Moscow would be able to work together again on energy or any other matter.

The Saudi-initiated oil price war that devastated the global industry for five weeks was the result of Russian and Saudi miscalculations

One thing is sure: the rift did not have to be so ugly. The Russians were stunned by the vehemence of the Saudi reaction to their refusal to take part in a 6 March deal. They obviously had no idea that it would rip the floorboards out from under an already creaking oil market.  

But why did the chasm between the OPEC+ partners become so large so quickly and the oil-industry destruction so vast and swift? The answer is miscalculation on a grand scale. 

Read more: Top oil producers agree cuts due to coronavirus crisis 

Setting the stage for what happened was that Vladimir Putin had finally acquiesced to Russian energy kingpins who had long contended that the country would be better off pumping more oil, not less – so it shouldn't be part of an OPEC+ agreement.  

The kingpins' position was that additional Russian production, even at lower global prices, would increase the state's revenue. What they failed to consider was that in a world with a global oil glut, unforeseen circumstances could send prices reeling.

Read more: Oil price war: An alternate theory on why Russia left the OPEC+ regime

Some global industry pundits and journalists maintained that Russia actually wanted an oil price war to wipe out the US shale industry. But as much as the Russian oil industry dislikes this American competition, and would love to see it crushed, those supporting this thesis were off the mark. 

The more likely scenario is that Moscow believed a price drop stemming from increased Russian output would be incremental and manageable, not disastrous. 

Read more: Gulf migrant workers count the cost of coronavirus 

Meanwhile, the Saudis failed to realise how quickly and how deeply the coronavirus would demolish global oil consumption. They were actually in good company on that miscalculation - few experts had expected the virus's impact to be so sweeping. In the end this was little consolation for Riyadh, however. 

The plunge in consumption came at the exact time that Saudi Arabia was starting the price war. The combination of the two sent oil prices to their lowest levels in two decades.

The plunge in consumption came at the exact time that Saudi Arabia was starting the price war. The combination of the two sent oil prices to their lowest levels in two decades

As the damage to oil markets worsened, each side repeatedly blamed the other for the failure of negotiations aimed at obtaining a 6 March OPEC+ agreement. They also diminished the possibility of a compromise with taunts that their side would be the one to survive the price war – while the other side would be the one having to give in.     

It was a 180-degree turnaround from the mutual admiration they were ladling on each other when Putin visited Riyadh in September 2019. One of the highlights of that visit was the sides promising to invest in each other's economies, a move that would have strengthened their partnership. 

The investment failed to materialise, however. The prime example was Saudi Arabia's Public Investment Fund reneging on a pledge to make its largest Russian energy-sector investment ever – acquiring 30 percent of Novomet, Russia's leading oil and gas service equipment supplier. 

Read more: Saudi Arabia relents in oil price war, as an uncertain future emerges

The Saudis also reneged on investing in Russia's Arctic LNG2 liquefied natural gas project and in acquiring a stake in Sibur, the country's largest petrochemical complex.  

Comments that Russia's energy minister made after the 12 April deal showed how badly Moscow had misjudged Saudi Arabia's inclination to retaliate against Moscow's 6 March intransigence.  

Aleksander Novak, Minister of Energy of Russia, said he found it inconceivable that a partner could resort to such aggressive tactics as flooding the world with discounted oil at a time when there was an unprecedented decline in consumption. He said it was downright irrational 

Meanwhile, Putin turned on its head the argument that Moscow wanted to destroy the US shale industry by contending that this was Saudi Arabia's intention when it started the price war. 

The rancour that the price war generated does not mean the Saudis and Russians will end their relationship. In fact, they have economic and strategic reasons for continuing it. 

But the past six weeks have shown that the relationship is fragile when serious challenges arise. 

They have also demonstrated how central OPEC+ is to the countries' ties. Without Russian participation in the oil-price-stabilising arrangement, that relationship is apt to be in serious jeopardy.