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Maximum pain: Saudi Arabia, Russia dig in for a long, bitter oil-price war

“Playing Russian roulette in oil markets may well have grave consequences,” said Fatih Birol, the executive director of the International Energy Agency.

The stability of countries such as Iraq, Angola and Nigeria may be threatened, while some oil-dependent nations may struggle to cover essential spending on health care, Birol said. The US shale boom could come to an end, with production declining as companies suffer financial distress.

Rosneft is planning to lift oil production as soon as the current OPEC+ deal ends, according to a person close to the company. The comments, the first Russian response to the oil price war launched by Saudi Arabia over the weekend, suggest that Rosneft could start boosting output as soon as April 1.

There’s no reason to doubt whether Rosneft’s has the Kremlin’s blessing. Chief Executive Officer Igor Sechin is a close ally of President Vladimir Putin and has been the most prominent naysayer of the country’s cooperation with Saudi Arabia and other members of the Organisation of Petroleum Exporting Countries.

The person, who spoke on condition of anonymity, said that Rosneft had prepared for any scenario and would be able to withstand the current plunge in oil prices. When asked how rapidly the company could increase production, the person said well-informed analysts estimate it could add 300,000 barrels a day within a week or two. That’s enough to roll back all of Russia’s OPEC+ output cuts, and then add some more.

The nation’s other companies could follow suit, after Russian Energy Minister Alexander Novak made clear last week that any production limits will no longer apply in April.

Russia’s finance ministry said the country is prepared for the price slump, with sufficient reserves to cover lost revenue “for six to 10 years” at oil prices of $US25 to $US30 a barrel. Brent crude, the international benchmark, traded at about $US35 on Monday.

Saudi Arabia slashed its crude prices over the weekend, with the biggest reductions aimed at Russia's prime markets in Europe.

Saudi Arabia slashed its crude prices over the weekend, with the biggest reductions aimed at Russia’s prime markets in Europe.Credit:Bloomberg

“Who will win this price war? One has to assume it will be Russia,” David L. Goldwyn, chairman of the Atlantic Council’s Energy Advisory Group, said in a note. Novak and Putin “are experienced, tough, and have no reason to capitulate.”

The Saudis don’t see it that way. The kingdom isn’t troubled by Monday’s slump and remains determined to achieve its objectives, even if it takes months, according to people familiar with the country’s stance.

The kingdom slashed its crude prices over the weekend, with the biggest reductions aimed at Russia’s prime markets in Europe. Riyadh plans to maximise production to compensate for lower prices, the people said, potentially pumping a record 12 million barrels a day.

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Even a 20 per cent increase in oil production wouldn’t compensate for crude prices that are less than half the level Saudi Arabia needs to balance its budget. The kingdom will suffer, but it won’t be the first time.

“Saudi Arabia has waged a number of market-share wars,” said Mark Katz, a senior non-resident fellow at the Atlantic Council.

“All of these battles caused more pain than gain.”

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