Decoding the Oil Price War 1: Moscow seized COVID crisis to hit US shale, force sanctions relief

This slideshow requires JavaScript.

The “Oil Price War of 2020” was launched at the worst possible time.  The COVID-19 pandemic was spreading to the world beyond China, promising to kill tens-of-thousands, and bring a global economic collapse.

However, this war was not preordained. Things could have gone otherwise from the start.  It was a decision, a sort of Pearl-Harbor-esque surprise attack, announced by Russian minister of energy, Alexander Novak, upon his arriving late to the OPEC-plus summit hall in Vienna on March 6.

If Moscow now abandons its all-out war on US shale, it will be because Putin has miscalculated.  He was willing to increase the pain for everyone else by exploiting the COVID-19 energy crisis in a half-baked attempt to get out from under the US sanctions.  However, the unanticipated repercussions might get too hot for Moscow.

The facts about why Putin decided to launch this oil price war are important to decode.  A key aspect to understand is that Moscow’s game plan was to blame the Saudis; and it soon began a disinformation campaign saying the Saudis launched the war.

We shall see, below and in future posts, how this blame-shifting is a stratagem designed to manipulate a section of US politicians and especially independent US oil producers, who traditionally hold strong, anti-Saudi sentiments (to be clear: they have good reasons to hold these anti-Saudi views), to preferentially sympathize with Russia against the Saudis and to lobby Trump and Congress to give Moscow relief from US sanctions.

Whether this Oil War strategy of Moscow can, at least in part, succeed in freeing Russia from US sanctions is not clear.  But, Moscow’s is highly motivated to succeed due to the significant constraints these sanctions are imposing on Russia.  They include sanctions in retaliation for its war against Ukraine, since 2014, which have undermined expansion of Russia’s domestic oil and gas sector; sanctions which have stalled Russian-German plans to finish the Nord Stream 2 pipeline; and sanctions on Rosneft’s efforts to sustain the Maduro dictatorship in Venezuela.

Today, as explained below, I would say the odds are against Moscow’s success, with the plan bordering on adventurism.  The Saudi’s initial response, in so far as it specifically targets Russia’s oil business, is rational; however, by de facto joining the Russian oil price war on US shale,  the Saudis will also provoke a backlash from powerful US oil-business and political interests, which is likely precisely what Putin and Igor Sechin hoped to bait the Saudis’ Prince MbS into doing.

Considering the pain the world is already suffering, Putin and Sechin’s callous game to exploit the COVID-19 oil-market crisis must be seen for what it is.  Most especially, one should not acquiesce to Moscow’s disinformation campaign to shift the blame elsewhere.

In Vienna: Who started the price war?

For weeks, Riyadh had aggressively lobbied the 10 OPEC and 11 non-OPEC members of the OPEC-plus alliance to agree to a major production cut.  This alliance had been born in 2016, of a newfound, market-dictated, yet grudging, Russian-Saudi mutual recognition of the reality that only such a large-scale collective effort could begin to get control of a market in long-term oversupply.  By December 2019, their OPEC-plus group had collectively cut about two million barrels per day (mbd) of production, while declines in Venezuelan and Iranian exports, due to US sanctions on both countries plus the gross ineptitude of the Maduro regime, and Libyan reductions due to its civil war were of about the same size.

The Saudi-driven plan for the Vienna March 6 summit was that OPEC-plus members must unanimously agree to cut a total of 1.5 mbd.  This  cut was to be added to the cuts agreed since December 2019.  The intent was to prop up prices in the face of the huge drop in oil demand due to the coronavirus, which was then rapidly expanding outside China.  At that time, analysts saw something like six-to-ten mbd of global oil demand already lost, primarily due to the COVID-19 shutdowns in China. Little did anyone realize that, as the pandemic spread to Europe and the USA, lost oil demand would explode to (at the time of this writing) what the IEA estimates to be 25-or-more mbd, roughly one-quarter of recent total global oil demand.

Finally, after due debate, all OPEC-plus members in the Vienna summit hall had agreed to the Saudi-proposed cuts, and were awaiting the arrival of Minister A. Novak to seal the deal.

However, when Novak arrived, he stunned the gathering by announcing that Moscow, the largest non-OPEC producer of the group, would not agree to cut production. [I recommend listening to this Atlantic Council and this Colombia Center on Global Energy Policy webinar, for much of the story I am telling here.]

The following, rather furtive, attempts of all OPEC-plus members to persuade the Russian delegation to reconsider proved useless.  It soon became clear that Novak was merely a messenger, without any authority to alter the message decided in Moscow, by Putin.

Putin had finally accepted the widely known, long-advocated position of of Igor Sechin, who had always bitterly opposed this OPEC-plus grouping and any Russian cooperation with Saudi Arabia to tame the long-oversupplied market.

ASIDE: Sechin has long been full of hubris about how well Russia could come out of any full-on war on shale now, as opposed to the outcome of the earlier Saudi-led war on shale in 2014, which was a disaster not only for the Saudis, but for the then-unprepared Russian economy.

On Sechin’s role, listen especially to Anders Asland’s commentary, in the above Atlantic Council webinar, explaining Sechin had finally convinced Putin of the merits of a price war, and how deeply he has wanted to hit US shale to undermine US sanctions on his company, Rosneft, and on himself personally.  Also, here is a selection of articles documenting the hubris of Sechin in the days after the Vienna meeting, boasting Russia could survive and win a years-long oil war against US shale and the Saudis.

  1. Egos and U.S. fracking trigger Russia-Saudi oil price war | The Japan Times
  2. Russia’s Rosneft CEO says we need to maintain contact with Saudi Arabia: RIA – Reuters
  3. Russia is digging in for a long battle in the oil price war| Financial Times
  4. Russia is out of control: The dangerous Mr. Sechin– Atlantic Council
  5. Russia Kills OPEC Plan to Curb Oil Output | Foreign Policy ]

Outside, when leaving, Novak clarified to the press that, as of 1 April, Russia would also consider that there is no longer any deal in force to continue the previously agreed 2 mbd of OPEC-plus cuts. He and others soon clarified that Russia could and would in fact rapidly increase national production by some 300,000 bd, or more.  Indeed, in a situation where demand was crashing at an historically unprecedented rate, such a boost to supply is a declaration of a price war to take market share from other producers  – specifically from US shale producers –  who, in the Russian and especially in Igor Sechin’s view, will be unable to survive.

Right or wrong in this business assessment, the fact is this war was declared in the face of the deepest world crisis since WWII, at a time when all other OPEC-plus members want no such dangerous war, and without even attempting to negotiate or even offer an ultimatum to the Americans on these matters before initiating hostilities.

Moscow’s takes aim at US shale

Moscow was not about to cut production again only to allow US shale producers to take market share from Russia and other OPEC-plus states. This is, of course, perfectly reasonable from a purely market and business-preservation perspective.

However, even if this were the full extent of Moscow’s motivations, when one considers the global health and economic crisis raging simultaneously, a socially responsible Moscow would have first engaged in some diplomacy, demanding that Washington join in negotiation with Russia, the Saudis and the remainder of OPEC-plus, after issuing a warning that US producers must now also do their part to help stabilize the oil market in the face of the historic threat of virus-driven economic crisis and collapse of oil demand. This would be a demand for nothing further than a crisis-duration, coordinated and fairly distributed global production cut.  This would be, in my view, a reasonable, responsible, and extremely helpful diplomatic effort on the part of Moscow.

If (and likely when) it failed, OPEC-plus would be seen globally as the responsible actor in cutting supplies, in spite of the US unwillingness; or, it might at some time, when it seemed the global economy could stand the shock, then switch to a price-war strategy, to enforce upon US shale some “discipline”.  But, any such “war” should be avoided in the present global crisis.

In fact, there is no reason to think the Saudis and the remainder of OPEC-plus would not have warmly welcomed such a diplomatic initiative by Moscow, given they had all already agreed to collective cuts before Moscow torpedoed the plan.

In any case, just as Mr. Trump has utterly failed to perform responsibly and competently in the face of the pandemic now ravaging the USA, this move by Mr. Putin reveals also his inability to act in a manner which would mitigate, not exploit and multiply, the crisis.

But, this was not merely a market-driven price-war declaration.  Russian delegates made clear Moscow’s  further motivations to reporters and other delegates in Vienna, repeatedly explaining that they were very angry at US sanctions against Nord Stream 2 pipeline and against Rosneft subsidiaries marketing Venezuelan oil, and this was their golden opportunity to weaken the growing US energy prowess and force it to back down on sanctions.

And, soon after the meeting, Igor Sechin, CEO of Rosneft, which produces about 40% of Russian oil, reiterated this same mindset to the international press.

Aside: This betrays a misunderstanding of the significance of the shale revolution involving gas and oil fracking, in the USA.  Even when it was not the worlds largest energy producer, it was able to impose such measures on countries it saw as violating the norms of the international system and US geopolitical interests.  These sanctions, then as now, often hit hard against the economic interests of particular US companies, especially major oil and gas firms.  However, this never prevented the USA from imposing such sanctions, generally with broad bipartisan congressional backing, and regardless of which party controlled the White House.  Again, this reveals another miscalculation on the part of Moscow in launching this price war to undermine the ability of the US to impose sanctions on Russian energy and financial activities.

The Saudi retaliation for Moscow’s surprise oil price war

Participants in Vienna report the Saudis were livid at the Russian delegation for blowing up the production cut agreement, which all other countries had agreed. In the next days Riyadh made clear they could not cut production alone without Russia’s participation. Instead, they would be forced to join Moscow’s oil price war on shale. However, they made clear they will do this in a way to maximally damage Russian market share.


Russian oil is exported principally via pipelines to Western Europe and Asian markets. The Saudi’s announced that they would preferentially dump their oil in these Russian markets at several dollars per barrel less than prices offered by Russian companies.

A second advantage the Saudis have to undermine Russian market share is the fact that Russian oils of several different weights and qualities from various Russian oil regions are mixed together in the Druzhba pipeline to Western Europe. However, Saudi oil will arrive by ship to Western Europe, and they can offer whatever qualities and weights local refineries prefer, offering serious competition to Russian deliveries. [See: “Oil price crunch could be bad news for Russia, FT, Letter, April 2, 2020.  And, “Russia’s oil supplies via Druzhba pipeline set to shrink as EU refiners cut output, Reuters, March 31, 2020.]

In short, the oil price war was begun by Moscow, primarily aimed at US shale for persistently grabbing market share from Russia and other OPEC+ members over the past few years. This price war was not begun by the Saudis; but the Saudis have been forced to join the war and also compete for market share. However, they will maximally direct their efforts against Russia’s oil business in order to pressure Moscow to return to OPEC+.

What might be done to stabilize the oil market, given the pandemic?

For now, let’s consider the possibility of joint, international action (other outcomes will be analyzed in future posts.)

Ideally, there would be some temporary agreement for a coordinated reduction in production between the USA, Russia and Saudi Arabia. The Saudis were clearly in favor of OPEC+ cutting production at the March 6 Vienna meeting. Russia was not in favor because USA shale would take OPEC+ market share during any production cut; but now many US shale producers are in favor of joining the Saudis and Russians.

Aside: As I write this, reports are that the Russians have in fact agreed to cut; but the details, and what, if any, would be the US participation in the OPEC-plus deal, are not yet available. More in subsequent posts

The head of the Texas Railroad Commission, which is legally able to implement “prorogation” – production regulation – in Texas, which produces 40% of US oil, is in favor of a deal with Riyadh and Moscow to jointly cut production, and he reports he has had positive discussions with both countries. [*]

ASIDE: For a useful discussion of how Texas and other oil producing states of Oklahoma, North Dakota, New Mexico and Colorado could in the coming days limit production in cooperation with an OPEC/OPEC-plus cut, see: “Unintended Consequences of US-OPEC cuts,” Energy Economist, April 6, 2020. More on this here, soon.

However, US participation in a coordinated cut with OPEC+ must be a political decision. Producers cannot collude to control production or prices unless President Trump declares this to be necessary for national security. [*]

There are two major obstacles to any such short-term deal:

First, some oil producers in the USA who believe they can continue to make a profit will likely oppose this.

Second: The Russian side has political demands. Mr Igor Sechin has repeatedly declared he wanted this oil price war because he wants relief from US sanctions that the US has placed against his company and against the Nord Stream 2 pipeline. President Trump has also indicated that he expects President Putin to ask for sanctions relief in exchange for any coordinated US-Saudi-Russian production-control deal.

What will likely happen? (or: Putin’s Ultimate Calculation)

On the one hand, if the Russian side feels its oil business can survive the present oil price war, it will likely insist on sanctions relief before agreeing to cut its production. However, Trump cannot deliver significant sanctions relief on Nord Stream 2 construction or for Russia’s annexation of Crimea without Congressional approval, which Congress is very unlikely to agree.

On the other hand, If the Russian side is worried that the price war is going badly and is becoming too costly, it might agree to a deal with the USA and Saudis to control production and end the price war without the USA lifting any sanctions.

If there is no deal for a joint US-Saudi-Russian production cut, oil-market and also geopolitical tensions will become increasingly heated.

One day, we may look back on this oil price war, irresponsibly launched in the midst of the greatest crisis since WWII, the coronavirus disease (COVID-19) pandemic and associated global economic collapse, as something like the shot that killed Archduke Franz Ferdinand of Austria on June 28, 1914 – or not.


[*] Note: About the last one-third of the above is slightly edited from written comments submitted to a Russian journalist just shortly before my Al Jazeera interview on 6 April (pictured above),  On Al Jazeera, I also emphasized that Moscow had begun the Oil Price War, not the Saudis.  The Russian publication (Sputnik); however, focused on the portion of my remarks about the possible US responses (i.e., citing the paragraphs above marked with [*] ), and not those discussing how Messrs. Putin and Sechin aimed to use the war on US shale as pressure to obtain US sanctions relief, and had initiated the Oil Price War at the OPEC+ Vienna meeting on 06.03.20.  That article, quoting several US experts as well, is here:  “Riyadh’s Price Dumping Didn’t Work – Only Joint Solution Can Revive Oil Market – Energy Experts,” Sputnik, 06.04.20 (unsigned).

[Consulting, seminars, talks and commissioned reports are available for professional clients and civil society groups.  Contact: twod-at-umich-dot-edu]


One response to “Decoding the Oil Price War 1: Moscow seized COVID crisis to hit US shale, force sanctions relief

  1. Pingback: Media Roundup for April 2020 | The Instinctive Path

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.