Saudi Arabia is feeling the pressure, but the prospect of a ‘crude’ divorce between Moscow and Riyadh seems premature
The Saudi-Russian relationship, which has played a key role in managing crude markets in recent years, occurred despite overt pressure from Washington on Saudi Arabia and its partners within the Organization of Petroleum Exporting Countries, OPEC.
To persuade Riyadh to open its taps, U.S. President Joe Biden even undertook an embarrassing visit to Saudi Arabia last July yet failed to reach a deal. Instead, Saudi Arabia, for obvious strategic reasons, continued expanding its relationship with Russia and China.
When the Ukraine crisis erupted, Saudi Arabia refrained from formally joining the anti-Russia camp and endeavoured to maintain a balance between the two sides.
Recently, however, cracks are beginning to appear in the alliance. Writing for Oilprice.com, Simon Watkins speculates that the diverging breakeven cost of a barrel of oil between these two major global crude producers is the reason that the relationship has reached its limits.
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Watkins speculates that the projected Brent oil price for 2023 – US$78 per barrel of Brent – is just about the level at which Saudi Arabia breaks even from a fiscal perspective but is way lower than Russia’s fiscal breakeven oil price of US$114, up from around US$64 per barrel before its Ukrainian misadventure.
And the possibility that Washington will react harshly to Riyadh’s continued tilt towards Moscow and Beijing, according to Watkins, “some doubt has surfaced somewhere at the top of the Saudi power structure that currently alienating the U.S. and its allies – and decisively reaffirming its commitment to Russia, and to China – is an unwise course of action.”
Watkins also underlined that ever since the refusal of Saudi Crown Prince Mohammad bin Salman to take a call from U.S. President Joe Biden last year, “several senior officials from the West Wing laid out in detail to King Salman what a world Saudi Arabia would be facing if the U.S. withdrew all support from it, including its military, and then finally enacted the ‘No Oil Producing or Exporting Cartels’ (NOPEC) bill.”
For those geostrategic reasons, Riyadh really cannot afford to infuriate Washington. But does that mean a ‘crude’ divorce between Moscow and Riyadh is in the offing? This appears improbable at this stage.
Last week, as the EU and G7 sanctions on Russian fuel exports came into effect, the Saudi oil minister, prince Abdulaziz bin Salman, a half-brother of the Saudi crown prince, warned that “sanctions and underinvestment in the energy sector could result in a shortage of energy supplies.”
“All of those so-called sanctions, embargoes, lack of investment, they will convolute into one thing and one thing only, a lack of energy supplies of all kinds when they are most needed,” Prince Abdulaziz said.
In early February, an OPEC panel endorsed the group’s decision to continue with its output target of cutting two million barrels per day until the end of this year. At the moment, OPEC does not appear to be giving in to the western pressure to ditch Russia on the ‘crude’ front.
In the meantime, State-controlled Saudi Aramco increased most prices for crude to be shipped to Asia in March. The company’s flagship Arab Light grade was lifted to US$2 a barrel above the regional benchmark, 20 cents more than its February price.
By raising its price for March-loading cargoes, Aramco has ensured that its crude will be relatively more expensive than other grades, providing an incentive for Chinese refiners to maximize volumes from other producers that offer spot cargoes. These include West African producers such as Angola and Nigeria, the United States and Brazil, and most importantly, Russia.
China has already been buying increasing volumes from Russia, so much so that Russia has displaced Saudi Arabia as China’s top supplier in several recent months. China imported 2.03 million barrels per day (bpd) from Russia in January, according to Refinitiv Oil Research data, up from 1.52 million bpd in December.
It’s now more likely that Chinese refiners will first turn to Russian crude if they are boosting imports, as will refiners in India, Asia’s second-biggest oil importer.
Some view this as providing an open field to Russia to keep selling to China, India, and other Asian markets in greater volumes, with Saudi crude taking over western markets left open by sanctions on Russian exports.
The prospect of a ‘crude’ divorce between Moscow and Riyadh seems premature.
Toronto-based Rashid Husain Syed is a respected energy and political analyst. Energy and the Middle East are his areas of focus. Besides writing regularly for major local and global newspapers, Rashid is also a regular speaker at major international conferences. He has provided his perspective on global energy issues to the Department of Energy in Washington and the International Energy Agency in Paris.
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