Saudi Arabia's Oil Supply Strategy Could Ignite New Price War with Russia, Analysts Warn

Saudi Arabia has given hints that it may flood the global market with oil supply, potentially pushing crude prices down to $50 a barrel. This bold move is seen as a response to the lack of commitment from the Organization of Petroleum Exporting Countries (OPEC) to reduce oil output.

This aggressive strategy could have significant implications for the global oil market, particularly impacting Russia, which heavily relies on higher crude prices to finance its war efforts in Ukraine. Analysts speculate that if Saudi Arabia proceeds with this plan, it could lead to a repeat of the oil price war witnessed in 2020, creating further economic challenges for Russia.

Economic Impact on Russia

Saudi Arabia's potential action poses a significant threat to Russia's wartime economy, which heavily depends on oil revenue. The Kremlin's struggle to secure adequate funding for its military operations in Ukraine could be exacerbated if global crude prices plummet due to increased Saudi oil supply. Luke Cooper, a research fellow at the London School of Economics, emphasized that a low-price environment in oil markets may hinder Russia's ability to finance its aggressive actions.

The urgency to maximize oil profits is particularly pressing for Russia, as the ongoing war in Ukraine has led to a massive increase in defense and security spending. These sectors are projected to account for a staggering 40% of all federal expenditures in Russia in the upcoming year. The country's finances are increasingly intertwined with oil revenue, with gas and oil production historically contributing 35%-40% to the national budget.

Challenges Ahead

Despite attempts to curb Russian oil profits, the West faces challenges in entirely restricting Moscow's revenue sources. The Group of Seven's $60 price cap on Russian crude, intended to stabilize oil supply while limiting the Kremlin's income, has had mixed results. While Russia has utilized unregistered "shadow" tankers to bypass these caps, the potential threat of Saudi Arabia lowering prices to $50 per barrel presents a more formidable challenge for Moscow.

The possibility of a renewed oil price war between Saudi Arabia and Russia looms, reminiscent of the tensions witnessed in 2020. The clash over production cuts led to both nations unleashing supply in a bid to outlast one another in a low-price environment. In such scenarios, the ability to withstand prolonged low oil prices becomes crucial, posing a considerable obstacle for Russia.

Financial Strain on Russia

Since the onset of the Ukraine conflict, Russia's cushion against low oil prices has significantly diminished. The National Wealth fund, which acts as a financial buffer, has been nearly halved, and the country no longer has access to Western currencies to diversify its foreign exchange reserves. These constraints further compound the financial pressures facing Moscow in the event of a prolonged low-price oil market.

Russian Response

The question of whether President Vladimir Putin is willing to engage in a price war with Saudi Arabia remains uncertain, given the multitude of variables surrounding Russia's oil sales. Deputy Prime Minister Alexander Novak's ambiguity regarding OPEC's potential increase in oil output signals a recognition of the delicate balance in the global oil market.