TURMOIL is gripping the oil markets. Panic has taken over. Prices are tanking. Coronavirus is hitting hard. Demand destruction is real. People are preferring to stay home. Travel industry is in the doldrums. Air travel is getting to a bare minimum. Cities and countries are under lockdown. All this while, the crude giants — Russia and Saudi Arabia — are dug in for a battle royale.

With Moscow and the Kingdom on warpath, Opec+, the alliance between the Saudi led, Organisation of Petroleum Exporting Countries (Opec) and Russia led group of 10 non-Opec oil-producing countries is dead – at least for the time being. Instead of micromanaging the markets, by cutting output as they have been doing since January 1, 2017, the two largest global crude producers have opted to open their taps to the max. Both remain glued to their respective positions. None is ready to budge.

The sequence of events is interesting. Last month, as the coronavirus pandemonium spread, Saudi Arabia requested Russia for an early Opec+ ministerial to discuss additional output cut, to prop up the falling crude prices. Russia refused, signifying, not interested.

But not all hopes were dashed. Putin’s remarks on March 1, underlining Russia was ready to cooperate with its partners to support the oil markets, even though it’s comfortable with current crude prices, rekindled some hopes.

Yet, on March 6 when the ministers finally met, the story turned out to be stunningly different. At 10:16 am on a wet and dreary Friday morning, Russia’s energy minister Alexander Novak walked into Opec’s headquarters to let his counterparts know; the Kremlin was not interested. The only carrot from Moscow was; it could roll over the current output cut for some more time but cannot accept any additional cuts.

This was a bombshell.

Riyadh was not ready to accept this. As per a Bloomberg report, a photo of the conference room after the delegates had left, hinted at the overall mood there: The small Russian flag by Novak’s seat in the conference room had been knocked over, and the Saudi Oil Minister Prince Abdulaziz while leaving the room reportedly gave a grave warning to his counterparts: “Trust me, this will be a regrettable day for us all.”

Both Russia and Saudi Arabia have their own reasons for picking up this war. Russia felt cutting output to prop up prices would be a gift to the U.S. shale industry. Now it was time to squeeze the Americans.

The Russian decision to go for war with the Opec was more about politics. In the wake of the US sanctions on Nord Stream 2, the Russian gas pipeline to Germany, and on the Russian state energy giant Rosneft, owing to its involvement with the sanctioned Venezuela, President Putin appeared determined to return the compliment by targeting the US shale industry.

Saudi Arabia had other considerations. Propping up crude prices was Riyadh’s top target. In order to balance its budget, Riyadh needs its oil to fetch $83.60 per barrel, says the IMF. In contrast, Russia needs only $42.40 a barrel. Saudi financial reserves are also depleting fast. By the end of January, it was close to $502 billion, down from a record high of $737bn in August 2014.

The upheaval came at a wrong time for the Saudi Crown Prince Mohammad bin Salman (MBS). Reports of political discontent are pouring in from Riyadh. Tens of potential opponents of the Crown Prince have been arrested in recent days. These are not the best of the times for MBS to be faced with a cash crunch. In a bid to stave off any such possibility, the Saudi political system has been used to buying the allegiance of its populace.

At stake could be the political future of MBS. Who blinks first, MBS or Putin, is now the issue?

Published in Dawn, March 15th, 2020