A fierce battle is brewing in India, where Russia has undercut the price of oil from its OPEC+ ally Saudi Arabia, paving the way for Moscow to expand market share in one of the biggest crude importers.
Russia Undercuts Saudi Oil Markets
Russian barrels were cheaper than Saudi crude during April through June, with the discount widening to almost $19 a barrel in May, according to Bloomberg calculations based on Indian government data. Russia surpassed the kingdom as the second-biggest supplier to India in June, ranked just behind Iraq.
India and China have become willing consumers of Russian crude as most other buyers shunned its barrels following the invasion of Ukraine. The South Asian nation imports 85% of its oil needs, and cheap supplies provide some economic relief as the country faces elevated inflation and a record trade gap.
The nation’s crude import bill swelled to $47.5 billion in the second quarter after a surge in global prices coincided with rebounding fuel demand, according to government data. That compares with $25.1 billion in the same period last year, when prices and volumes were lower. Oil has tumbled recently on concerns over an economic slowdown, offering some respite to consumers.
“Indian refiners are going to try and get their hands on the cheapest crude possible that works with their refinery and product configurations,” said Vandana Hari, founder of Vanda Insights in Singapore. “Russian crude fits that bill for now. The Saudis and Iraqis are not entirely losing out because they are directing more supply to Europe.”
While the discount of Russian oil to Saudi crude narrowed in June, barrels were still around $13 cheaper, averaging about $102. That compares with a premium of just over $13 in March, although most of India’s monthly supply would have been fixed prior to the invasion in late February. The kingdom was the second-biggest supplier to India in 2021, while Russia was the ninth largest.
2020 Russia–Saudi Arabia oil price war
On 8 March 2020, Saudi Arabia initiated a price war on oil with Russia, facilitating a 65% quarterly fall in the price of oil.In the first few weeks of March, US oil prices[ambiguous] fell by 34%, crude oil fell by 26%, and Brent oil fell by 24%.
The price war was triggered by a break-up in dialogue between the Organization of the Petroleum Exporting Countries (OPEC) and Russia over proposed oil-production cuts in the midst of the COVID-19 pandemic.
Russia walked out of the agreement, leading to the fall of the OPEC+ alliance. Oil prices had already fallen 30% since the start of the year due to a drop in demand. The price war is one of the major causes and effects of the ensuing global stock-market crash.
On 8 March 2020, Saudi Arabia announced unexpected price discounts of $8 to $6 per barrel to customers in Europe, Asia, and the United States. The announcement triggered a free fall in oil prices and other consequences that day, with brent crude falling by 30%, the largest drop since the Gulf War.
Saudi Arabia and the Oil Price Collapse
Russia is in much better financial shape than Saudi Arabia, especially with a flexible exchange rate as the ruble depreciates, the value of its exports increases. If it would also lose billions of dollars in revenue from falling oil prices, the government has a much smaller budget deficit than Saudi Arabia and has $550 billion in foreign exchange reserves.
Saudi Arabia will face large budget deficits, it will have to issue much more debt, it will have to run out of reserves, and the longer this cycle goes on, the more destructive it is, said analysts.
Saudi Arabia still has foreign exchange reserves of $500 billion, but these increased from $740 billion in 2014.
Several years of falling oil prices forced the kingdom to borrow money and reduce energy subsidies for its citizens. Crown Prince Mohammed bin Salman is now counting on his reserves to help diversify the Saudi economy for the future.
