DUBAI – The war between Russia and Saudi Arabia over the price of oil represents a chess match of uncertain outcome in which the Gulf countries appear to be well-positioned, though that advantage will erode if the confrontation drags on.
The shock to global oil and financial markets from the coronavirus outbreak led Riyadh to call for production cuts, but Moscow rejected the Saudi approach and last weekend’s meeting of the OPEC+ countries ended without agreement.
Saudi state oil company Aramco, the world’s largest producer, announced that starting April 1, it will boost output by 2.5 percent to 12.3 million barrels per day.
In response, Russia said it is capable of increasing production by 500,000 bpd.
While a drop in the oil price could be good for consumers in the short term, it could lead eventually to supply shortages by discouraging investment in prospecting and production, according to Andy Gibbins, director of UAE-based oil consultancy Glastac.
“For all service sectors supplying the oil and gas industry, effects are very negative, as oil companies must cut costs wherever possible in order to better manage overall profitability,” he said.
Saudi Arabia and the other member-states of the Gulf Cooperation Council (GCC) are better equipped to cope with falling prices due to their extremely low production costs.
In the long run, however, “all major producers need higher prices to sustain their national economies,” Gibbins said.
“I see this as a game of chess and so far, we have only seen the opening moves,” he said.
The World Bank said on Tuesday that the combination of plunging oil prices and the coronavirus leaves the Middle East and North Africa (MENA) more exposed than other regions.
Gulf countries, in particular, are already suffering from a slowdown attributable to the coronavirus, or COVID-19, as China – where the outbreak started – is a major buyer of oil from the Gulf and has reduced purchases in line with a reduction in economic activity.
Financial markets in the Gulf region have seen paper losses of roughly $300 billion in the last few days. Worldwide, losses have surpassed $7 trillion.
“Oil war between two powers, Saudi and Russia, has sparked a new oil armageddon that is unlikely to die down any time soon,” Arun Leslie John, chief market analyst for Century Financial in Dubai, told EFE.
A fall of the oil price in the range of 25-30 percent would be enough to cause repercussions in other economic sectors, he said.
“Markets are now fearing that further fall in oil prices is likely to have a knock-on effect on credit markets as the majority of the GCC government spending is directly or indirectly linked to crude oil prices,” John added.
Cyril Widdershoven, director of Verocy, a risk consultancy focused on MENA, said that “if the situation continues for longer than six months, the reaction or outcome will be severe.”
“Saudi oil and gas is needed worldwide, so clients always will be there. Income at present will be lower. It all depends if the oil price war and demand destruction continues for longer,” he said.