Tuesday10 March 2020 ★ FINANCIAL TIMES 3
it. Opec alone cannot do it. We need
other producers.” When asked about
the country’s move to dramatically
reduce export prices, he replied: “What
else is the solution?”
Saudi Arabia does have financial buff-
ers in the short term, with foreign
reserves of $502bn. But analysts say
that if oil prices remain at current levels
it will be forced to dip into those savings.
Monica Malik, chief economist at Abu
Dhabi Commercial Bank, said the king-
dom could face an extra $60bn in fund-
ing requirements this year, with the def-
icit at risk of doubling to $100bn if oil
remains at current levels and the gov-
ernment maintains spending.
“If the price war continues, Saudi Ara-
bia will have to retrench spending to
limit the fiscal shortfall, which will be
painful for the non-oil economy,” she
said. “This is at a time that the economy
needs to grow and create jobs.”
Riyadh could still be hoping Moscow
will reconsider, analysts say. But Russia
has larger reserves, a free-floating cur-
rency and a more diverse economy.
Saudi officials were aware of Mos-
cow’s reluctance to continue cuts while
US supplies remained robust, meaning
Riyadh considered of ramping up out-
put for some time, analysts say.
“Saudi Arabia is taking an awfully big
gamble. Its strategy may be aimed at
forcing Russia back to the table. But if
that does not work — we do not believe it
will — then this could be a shift of pro-
found consequence with repercussions
for oil producers globally,” said Amrita
Sen at Energy Aspects.already been told to cut spending, two
people familiar with the matter said.
Yesterday government advisers were
canvassing the opinions of bankers as
they discussed policy options.
For many Saudis it will rekindle pain-
ful memories of the last oil slump in- Ali al-Naimi, then oil minister,
pursued a similar strategy of ramping
up production in the hope volume
would offset price declines. The policy
failed as the economy tanked.A budget
surplus became a $98bn deficit in 2015.
Riyadh sealed its agreement with Russia
in 2016 to prop up crude prices by cut-
ting production in what became known
as the Opec+ alliance.
Prince Abdulaziz as pursued a moreh
aggressive approach to the kingdom’s
relationship with Russia than his prede-
cessor, Khalid al-Falih.
A half-brother of the crown prince,
Prince Abdulaziz believes Moscow has
not fulfilled its side of the deal by mak-
ing substantive enough production cuts
and wants to reassert Riyadh’s authority
over Opec+. Still, a person familiar with
Saudi energy policy said the kingdom
had sought a consensus among produc-
ers, even as some Opec delegates said
Prince Abdulaziz alienated Russia. “The
reality is Saudi Arabia alone cannot doto modernise was starting to pay off.
Petrodollars are the crucial driver of
economic activity in the kingdom, and
with oil prices now trading at about $
a barrel, economists expect the govern-
ment to have to slash spending, delay
projects, increase borrowing and brace
for a double-digit budget deficit.
“Everybody [in Saudi Arabia] is sur-
prised. Some say ‘we had to show mus-
cle to Russia, we are the big guys in the
room’. I think it’s a kind of brinkman-
ship, but there’s going to be a heavy
price for Saudi Arabia and other oil pro-
ducers,” said a Saudi-based analyst. “If
they sat down and thought about this
and it was a rational decision, they
couldn’t have picked a worse time.”
Saudi investors have already dis-
played their unease as the kingdom’s
Tadawul index has lost more than 15 per
cent in value over the past two days.
Trading was suspended inSaudi Ara-
mcoyesterday after its shares plum-
meted 10 per cent. The state oil com-
pany’s stocks fell below their initial pub-
lic offering price for the first time on
Sunday — three months after its listing
was hailed by Saudi officials as a historic
success for Prince Mohammed.
The sense of uncertainty in Saudi Ara-
bia has been exacerbated by a sweeping
crackdown that coincided with the oil
meeting and targeted senior royals in
what many view as part of the 34-year-
old crown prince’s attempt to neutralise
potential rivals. “He [Prince Moham-
med] is feeling the pressure on all
fronts,” said a kingdom executive.
Government departments haveA N D R E W E N G L A N D A N D A N J L I R AVA L
LONDON
S I M E O N K E R R— DUBAI
Shortly after talks between Opec and
Russia collapsed last week with the par-
ties failing to agree on oil production
cuts to prop up weakening prices, Prince
Abdulaziz bin Salman, Saudi Arabia’s
energy minister, cryptically said the
kingdom would keep markets “wonder-
ing” about its next move.
They were not left guessing for long.
Within 24 hours, Riyadh took the dra-
matic decision to trigger an aggressive
price war that has pushed crude prices
to their lowest levels in four years and
rocked global stock markets.
The move is viewed by Opec delegates
as part powerplay, part brinkmanship
by the world’s top oil exporter, which
has spent three years spearheading co-
ordination between Opec and Russia to
trim output to keep crude prices at rea-
sonable levels. Once Moscow rejected
Riyadh’s request for deeper cuts on Fri-
day, the kingdom took the nuclear
option to flood the market with addi-
tional oil at hugely discounted prices.
With the coronavirus outbreak
heightening concerns about a global
recession and the oil price outlook
already bleak, Riyadh’s calculation
appeared to be that if Moscow would no
longer play ball, it should increase vol-
ume and grab market share. But it is a
high-stakes gamble that will damage
Saudi Arabia’s economy, just as officials
were hoping a pick-up in non-oil growth
last year was evidence that Crown
Prince Mohammed bin Salman’s drive
A N J L I R AVA L A N D DAV I D S H E P PA R D
LONDON
Saudi Arabia’s move to fire the first
shots in an oil price war prompted
crude’s biggest one-day fall since the
early 1990s Gulf war. But why did the
world’s top exporter decide to move so
aggressively, with demand reeling from
the coronavirus crisis? And what does it
mean for the wider oil industry?
What is behind the Saudimove?
Saudi Arabia had wanted to lead Opec
and Russia in makingdeeper cuts o oilt
production to support crude prices in
the face of the coronavirus outbreak.
But when Russiabalked at the plan, the
Gulf kingdom turned on an ally it had
worked with to prop up the oil market
since 2016.
Riyadhresponded by raising produc-
tion and offering its crude at steep dis-
counts. Analysts said thatwas an
attempt to punish Russia forabandon-
ing the so-called Opec+ alliance. Saudi
Arabia may also have wished to cement
its position as the world’s top oil
exporter, analysts added.
“There was a consensus among Opec
[to cut production]. Russia objected and
has said that from April 1, everyone can
produce whatever they like. So the king-
dom, too, is exercising its right,” said one
person familiar with Saudi oil policy.
Analysts have questioned the wisdom
of Saudi Arabia’s approach. Its economy
is not immune to a price crash, even if it
believes it can win market share.
Why did Russia not co-operate?
Russia said it wanted to see the full
impact of the coronavirus on oil
demand before taking action.
But Moscow has also been keen to test
the US shale industry. It believes uttingc
output would only hand a lifeline to a
sector whose growth has turned the US
into the world’s largest oil producer,
gaining customers at Russia’s expense.
US sanctions on Russian energy com-
panies, including those thattargeted het
trading arm of state-backed oil cham-
pion Rosneft last month, and attempts
to halt the Nord Stream 2 gas pipeline to
Germany, have infuriated the Kremlin.What will happen to the US shale oil
industry?
The price crash came at adifficult time
for US shale. While production
has soared over the past dec-
ade,leapfrogging that of
Russia and Saudi Ara-
bia, the industry has
burnt through borrowed cash,
alienating investors.
That has left it vulnerable to a
drop in prices. The huge oil price
fall since the start of the year has
thrown any
remaining
expansion plans
into doubt.
The hit to produc-
tion, however, may be
muted. Many of the small
independent producersthat make up most of the US shale sector
have hedged their output at higher
prices. Supply is unlikely to fall imme-
diately.
For President Donald Trump the
price crash had posed a conundrum.
Lower oil prices are an important part of
his pitch to voters, frequentlycalling no
Opec to bring them down. But a pro-
longed price fall could spell economic
trouble for energy-producing states
such as Texas and North Dakota.Will prices keep falling?
Hopes for an oil price recovery in the
short-term have been pinned on the
coronavirus outbreak being contained
faster than expected. Traders have
warned that global oil demand in 2020
couldcontract forthe first time since
the financial crisis more than a decade
ago. Oil consumption could be at least
1 to2 per cent lower this year than
what analysts had expected t thea
start of the year.
But with the possibility of the
coronavirus developing into
a global pandemic, crude’s
short-term prospects look
bleak.
Much depends on how
aggressively Saudi Ara-
biaincreases produc-
tion. It has more spare
capacity than any
other country, so it
can boost output
quickly and poten-tially add more than 1m barrels a day ni
the coming months. It can also pull oil
out of storage toraise exports.
Russia’s ability to boost its output is
probably more constrained. Lower
prices could jeopardise President
Vladimir Putin’s onger-term promisesl
toinvest n areas such as infrastructurei
and social spending.
Saudi Arabia may have hoped that the
enormity of the price fall would force
Russia to return to the negotiating table,
but that seems unlikely.What does it mean for big oil?
After oil prices crashed in 2014 the likes
ofRoyal Dutch Shell,BP nda ExxonMo-
bil etrenched. Theyr cut costs aggres-
sively, sold off assets and streamlined
operations to stay profitable at lower oil
prices. But while they have become
more efficient, generating more cash
when prices averaged around $65 a bar-
rel over the past two years than when
they traded at $100, they now face dif-
ferent pressures.
Companies have been desperate to
maintain dividends andpayouts ot
shareholders unsettled by predictions
oil demand could peak in the next dec-
ade. At the same time they need to
reduce debt and look to new energy
sources such as renewables, fearing a
long-term shift away from fossil fuels.
With oil at less than $40 a barrel,
many investors doubt this is possible.
Share prices will robably come underp
pressure in the coming days.O I L P R I C E FA L L
Crude crash lobal producers count cost of Riyadh-Moscow spatG
D E M E T R I S E VA STO P U LO— WASHINGTONDonald Trump blamed Russia and
Saudi Arabia for the plunge in US
stocks, as he attempted to shift atten-
tion from rowing criticism of his han-g
dlingofthecoronavirusoutbreak.
“Saudi Arabia and Russia re arguinga
over the price and flow of oil. That, and
the Fake News, is the reason for the mar-
ket drop!” Mr Trump tweetedyester-
day.
As the number of Americans with the
virus has grown,the US president has
come under harsh criticism for how he
is tackling the coronavirus crisis, partic-
ularly his rhetoric, including advice that
contradicts US health authorities.
Again yesterday, Mr Trump played
down the scale of the coronavirus epi-
demic and said thecollapse in oil prices
would be “good for the consumer” by
loweringpetrol prices.
In a series of tweets lashing out at crit-
ics, Mr Trump said 37,000 Americans
had died from the flu last year, while
only 22 people had so far been killed by
coronavirus.
“Nothing is shut down, life & the econ-
omy go on,” he tweeted. “At this
moment there are 546 confirmed cases
of Coronavirus, with 22 deaths. Think
about that!”
Mr Trump was expected to meet his
economic team at the White Houseyes-
terday afternoon to discuss ways to
reduce the economic fallout from the
coronavirus outbreak.
US health authorities have identified
566 cases of coronavirus with 22 deaths,
most of which werein Washington state,
according to Johns Hopkins University.
Mr Trump said at the weekend that he
was not worried about the situation,
even as several people in the area
around the US capital were diagnosed
with coronavirus.
Ted Cruz, a Republican senator, said
he would stay at home in Texas after
learning that he had interacted with a
man who tested positive after attending
the Conservative Political Action Con-
ference, a four-day event held two
weeks ago less than 20km from the
White House. Mr Trump and Mike
Pence, his vice-president wholeads het
White House coronavirus task force,
also attended. The White Houseresponse to the crisis drew more criti-
cism at the weekend after the US sur-
geon-general and Anthony Fauci, the
head of the US National Institute of
Allergy and Infectious Diseases and a
member of the coronavirus task force,
gave conflicting accounts of the number
of test kits that had been distributed
California waspreparing or an influxf
of cases esterday as the Grand Prin-y
cess, a cruise ship carrying 3,500 pas-
sengers, was expected to dock in Oak-
land. The ship is carrying 21 crew and
passengerswith the virus. Mr Trump on
Friday suggested that he did not want
the ship to dock because it would
increase the numbers of reported cases
on the US mainland.
Some critics have compared his
actions o the way George W Bush dealtt
with Hurricane Katrina, a devastatingstorm in 2005 that killed almost 2,
people. The former president suffered
politically for what was viewed as inept
management of the aftermath.
“This is his Katrina event... He is
incompetent and this is the proof. We
are way behind on this,” Tom Steyer, the
former Democratic presidential candi-
date said.
Mr Fauci warned at the weekend that
people should bethinking harder bouta
whether to attend big events, as authori-
ties shifted the focus from containment
to mitigation, or stopping the spread of
the virus.
Mr Trump has said he will continue to
hold rallies as he campaigns for re-elec-
tion in November. The two Democratic
contenders — Joe Biden, the former
vice-president, and Bernie Sanders, the
Vermont senator — have both saidtheir
campaigns were co-ordinating with
local and state health authorities but
that they did not intend to cancel
events.
Six states, including Michigan and
Washington, will hold primaries today,
with Florida and Ohio awarding their
delegates a week later.Saudi Arabia likely to suffer
for taking nuclear option
Kingdom set to slash spending, raise borrowing and endure double-digit deficit
Plunging stocks
Trump says cheaper fuel
‘good for consumers’
M A X S E D D O N— MOSCOWRussia said it could withstand low oil
prices for as long as a decade, setting
the stage for a prolonged battle with
Saudi Arabia after talks overOpec pro-
duction cuts collapsed, leading to the
biggest one-day fall in prices since the
1991Gulfwar.Russia’s finance ministry saidyesterday
it woulddraw from its $150bn national
wealth fundto boostgovernment
spending while oil prices remained at
between $25 and $30 a barrel. It said it
couldcover the lost revenue for the next
six to 10 years.
The collapse in the oil price, which fell
as much as 30 per cent on Sunday after
Saudi Arabia retaliated against Russia
with threats to discount its crude and
boost output, pushed the Russian rou-
bleto its lowest level against the dollar
since January 2016.
But Moscow appears convinced that it
is better positioned than Riyadh to ride
out theprice drop.
“For now, they are counting on this
being a temporary scenario. But saying
this shows they are ready for anything,”
said Sofya Donets, chief Russia econo-
mist at Renaissance Capital.
Vladimir Putin, Russian president,
was persuaded to break the existing deal
with Opec after meetingdomestic oil
companies, which have opposed the
production cuts since they were agreed
in 2016, according to people familiar
with the talks.
Rosneft, the state-run oil company
led by Igor Sechin, a former KGB agent
and longtime Putin confidant, saidthe
deal through which Opec members nda
Russia cut production to supportpriceshad become “meaningless” for Moscow
in the face of increased competition
from US shale producers.
Helima Croft, head of global com-
modities strategy at RBC Capital Mar-
kets, said Mr Sechin was also motivated
by the US decision to impose sanctions
on Rosneft’s trading arm last month for
helping Venezuela to sell oil.
“For now it seems that Sechin is not
seeking to eliminate simply the market
share of US shale producers, but the
aggressive US sanctions policy that
American energy abundance has ena-
bled,” Ms Croft said.
“Now we have a chance not just to pro-
duce and sell as much as we need to, but
to throw American shale overboard,”
Dmitry Kiselev, the director of Russia’s
main state news agency, saidon social
media. “Our budget is much more stable
than Saudi Arabia’s and is ready for low
oil prices, unlike the kingdom’s.”
Yesterday’s fall in the oil price has
seen Russian companies lose billions of
dollars in value. Rosneft stock fell 22 per
cent in London,whilegas producer
Gazprom ropped 18 per cent.d
Russian oil producers could compen-
sate for lower prices by increasing out-
put but had only limited capacity to do
this,said Dmitry Marinchenko, an oil
analyst at Fitch Ratings.
“Russia could manage to increase pro-
duction by 250,000-300,000 barrels in
the coming months, or by around 3 per
cent — but this seems to be immaterial
compared to losses caused by lower
prices,” he said.
Mr Putin’s bet relies on a calculation
that the Russian economy is in a
stronger position today than in 2014,
when a sharp devaluation of therouble
forced the central bank to bail out state
lenders after Rosneft refinanced $18bn
in foreign currency debt.
Russia has $570bn in foreign currency
reserves, compared with Saudi Arabia’s
$502bn, and it can balance its budget at
an oil price of $42 per barrel — about
half that of Saudi Arabia.
That includes thenational wealth
fund, whose$150bnvalue is equivalent
to 9.2 per cent of gross domestic prod-
uct. Those reserves could provide
$1.7bn a month for the next decade, f oili
prices remain at current levels.
Additional reporting by Nastassia
AstrasheuskayaWealth fund
Russia claims it has financial
firepower to survive fallout
‘This is [Trump’s]
Katrina event... He
is incompetent andthis is the proof ’
Feeling the chill: shares in Gazprom
dropped 18 per cent yesterdayPowerplay: a banner outside a mall in Jiddah, Saudi Arabia, shows Crown Prince Mohammed bin Salman, left, and King Salman —Amr Nabil/AP
‘If they sat down and
thought about this,
they couldn’t havepicked a worse time’
MARCH 10 2020 Section:World Time: 3/20209/ - 18:32 User:john.conlon Page Name:WORLD2 USA, Part,Page,Edition:USA , 3, 1