Russia broke from OPEC on Friday, refusing calls to decrease oil production. President Vladimir Putin ordered his energy minister, Alexander Novak, to inform Saudi Prince Abdulaziz bin Salman of the decision, a message delivered early Friday morning at OPEC headquarters in Vienna, according to Bloomberg.

Impact of Russia’s Refusal to Decrease Production

Effects from the decision immediately rippled through the Middle East energy market. Saudi Arabia was the first to respond by preparing to increase its own production to make up revenue lost by sunken prices. Brent crude is down nearly 33% since the beginning of the year, thanks to the Covid-19 coronavirus. Upon news that Russia would not slowdown its production, oil prices slid a further 10% as markets grappled with the possibility of Russia and OPEC both producing a supply that far exceeds the global demand.

Although the Saudi minister did not announce firm plans to ramp up production, but OPEC did not move to restrict its members from doing so. 

“I will keep you wondering,” Abdulaziz told reporters. The rationale for such a reaction is that the kingdom must continue supplying the world with oil, otherwise the United States and Russia, both of which have produced without restraint, will encroach further on Saudi territory.

Shares of Saudi Aramco, 1.5% of which recently went public, dipped below the original IPO price to $8.24, CNBC reported. Tadawul, the Saudi stock market, echoed the oil industry woes, falling 7.7%.

Stock markets of Abu Dhabi, Dubai, and Kuwait all followed suit, dropping 5.%, 7.47%, and 10%, respectively. 

Russia’s decision appears to have been a result of failed negotiations, not the original intention, although it is conceivable Moscow purposefully made its terms onerous. US shale production has ran like gangbusters since President Donald Trump assumed office and cut restrictions on the industry.

Putin’s Perspective

To Putin, OPEC offered little that could offset the risk of letting America run rampant. Conversely, Moscow benefits by letting oil prices bottom out because US producers spend more on operations costs than their Middle East or Russian counterparts.

OPEC ministers reportedly stunned when five hours of discussion resulted in Russia walking away, Bloomberg reported. A source at the meeting said they were speechless, and rightfully so. 

Meanwhile in the Gulf …

Aside from the Emirates, OPEC nations derive a majority of their income from oil. The biggest slap might have come to Saudi Arabia in particular as it is in the midst of a multi-billion dollar Vision 2030 program. Jim Krane, Persian Gulf analyst at Rice University’s Baker Institute, suggested the kingdom might need to resort to financing its government spending, perhaps leading to a pause in Crown Prince Mohammed bin Salman’s (MbS) 2030 ambitions.

Worse, if the markets continue to fall or even remain as low, MbS’ decision to press for the Saudi Aramco IPO could be called into question. Several members of the royal family were recently arrested, reportedly because they were plotting a coup. While the truth is not yet known, it is plausible that MbS is taking preemptive measures to prevent anyone remaining in the higher ranks from question his economic policies.

For the past three years, Russia was a member of OPEC+, the plus being Moscow, but the group failed to counter a rise in American energy production. The Trump administration has also used political maneuvers to target the Russian oil industry. US sanctions have halted the Nord Stream 2 pipeline between Siberia and Germany and America has also leveraged itself against Rosneft business in Venezuela. 

Kremlin Goal: ‘Stop U.S. Shale Producers and Punish the U.S. for Messing with Nord Stream 2’

“The Kremlin has decided to sacrifice OPEC+ to stop U.S. shale producers and punish the U.S. for messing with Nord Stream 2,” said Alexander Dynkin, president of the Institute of World Economy and International Relations in Moscow, a state-run think tank. “Of course, to upset Saudi Arabia could be a risky thing, but this is Russia’s strategy at the moment – flexible geometry of interests.”

The temporary fallout of OPEC+ is a gift for Rosneft, which has increasingly felt encumbered by its production controls. 

“If you always give in to partners, you are no longer partners. It’s called something else,” Rosneft Spokesman Mikhail Leontiev told Bloomberg. “Let’s see how American shale exploration feels under these conditions.”

Rosneft can break even at $42 per barrel and has cash reserves to sustain itself for a considerable amount of time at lower prices. Hurting American companies will take a while, as they too have plenty of cash reserves to weather the storm. 

Long-term, Russia is damaging Saudi Arabia far more than the US. Although Riyadh and Moscow are both pursuing unrestrained production, they have yet to answer the question of finding buyers. Demand in China, the largest importer of Russian and Saudi oil, has nose-dived by four million bpd at the height of the Covid-19 outbreak and has yet to completely rebound, according to the Financial Times.

Similar lockdowns in America and Europe will most certainly reduce the demand, possibly leaving Russia and Saudi Arabia sitting on a large amount of unsold reserves.