Moscow and Riyadh found common language

The visit of Salman bin Abdul-Aziz al-Saud to Moscow — a historic event. We can say that only for the sake of it Russia was worth to participate in the war in Syria. First, Russia has shown that not only intends, but also able to actively influence developments in the region, the visit of the Saudi king — the recognition of this fact. And after a visit no doubt about the importance of the role of Russia in world politics no one is. The political success of Russia is obvious.


photo: Kirill Iskoldsky

But the main motive of the visit was not political. The economy of Saudi Arabia to patova condition. In 2017, the budget deficit of the Kingdom amounted to almost 15% of GDP. It is clear that its accumulation was due to the fall in oil prices, which Finance Riyadh depend on 90%. By international standards it’s a disaster, but for any other country is the solvency of Saudi Arabia”s beyond doubt, although in 2014 the volume of accumulated foreign exchange reserves declined by 1.5 times — from $737 billion to $487 billion.

The problem should be solved. The decision, and the bold, Riyadh offered. For a start has already been resolved from 2018 to stop subsidizing domestic fuel prices, it will strongly reduce the deficit. Step painful, it can lead to an increase in domestic gasoline prices, which until you can almost not notice the 80%. Also agreed that the priority to develop solar energy. There are more ambitious plan for economic diversification: the country’s transformation into a full-fledged financial center of the Muslim world. Tool — IPO state-owned Saudi Aramco.

Then where did Pat? It put the price of oil. Saudi Arabia needs high prices — and for the budget, and for the successful placement of shares of Aramco. But high prices is the invitation of the us shale competitors, for which displacement from the market by the Saudis and had started the first round of falling prices, fell from 2014 in 2.5 times.

A very typical example: after meeting the king of Saudi Arabia and Vladimir Putin of oil went up from $55,5, and, of course, the leaders of growth became shares of U.S. oil giants Exxon Mobil, Chevron, ConocoPhillips and others. As suggested by Vadim Merkulov from IR “freedom Finance”, the American company take on the role of the parasite — they do not cut production, but at the same time enjoying a moderately stable growth of oil prices. “Parasite” and leave on the conscience of the analyst. In fact, the behavior of American companies shows that the reduction in OPEC production+ it is simply good that obviously.

Then agreed, Salman bin Abdul-Aziz and Vladimir Putin? Official comments have been that the leaders of the two largest oil-exporting countries believe in the effectiveness of OPEC policy+ and consider further measures to constrain the production and export of oil in order to maintain high prices. But you need one important clarification.

I propose to consider the question of how long the restraint. Not be discounted that oil companies are determined to launch new projects, they are like generals who are planning new trips, not too thinking about the interests of civilians. But they are not solutions. Most likely, this topic was also discussed in the Kremlin.

Extension of restriction on oil production and in fact highly likely. Decisive for the new time factor — the time of the IPO Saudi Aramco. While it’s scheduled for next year. And before the vote Saudi Arabia is clearly not going to provoke the fall in oil prices, and therefore the offering price of the shares of its biggest companies.

The moment of truth is the pace and the IPO. If they justify the calculations and expectations of Riyadh, may become a reality the second round of a price war with lancelike. But there is another side. Potential buyers of shares in Aramco is hardly the first American companies and their economic interest to bring down prices prior to the IPO. This largely explains today’s paradox — the increase of shale production in the absence of a recoupment taking into account the debt of the companies production. Most likely, the surge in shale production may follow in the IPO.

So the probability of a new oil price war is high enough. And in fact dates its origin could discuss Vladimir Putin Salman bin Abdel-Aziz al-Saud.

official channels

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