(Bloomberg) -- U.S. President Donald Trump’s bid to end the oil war between Russia and Saudi Arabia is breeding cautious hopes in Moscow of a possible way out of the damaging stand-off, potentially reversing some of the collapse in crude prices.
The fact that it was Trump who placed the call to Vladimir Putin Monday, reversing his earlier stance welcoming the drop in oil prices, was seen in Moscow as a positive sign, according to three people familiar with the matter.
Trump’s move to appeal for Russian help in stopping the oil rout could allow Putin to appear in a stronger position even if he needs to make some concessions, according to Andrey Kortunov, director of the Kremlin-founded Russian International Affairs Council. “The Kremlin views the call itself as a kind of diplomatic victory,” he said.
The Kremlin’s refusal early this month to deepen output cuts with Saudi-led OPEC led Saudi Arabia to flood the world with oil, sending prices into a tailspin. But it was the collapse in demand cause by the shutdown of large parts of the world to combat the spread of Covid-19 that has pushed crude to the lowest levels in decades.
Not Giving Ground
For the moment, Russia isn’t giving any ground, while Saudi Arabia has shown no willingness to change course and is following through on its threat to dramatically increase exports next month. Even if the big producers were able to agree to reduce output, it’s not clear they could cut enough to offset the plunge in demand -- by some estimates equivalent to the entire amount produced by Saudi Arabia and Russia together -- wrought by the virus.
Russia is hoping that the U.S. president can persuade its traditional ally Saudi Arabia to refrain from pumping more oil, said a person close to the Kremlin. But another person familiar with the discussions said Moscow’s also worried that Washington and Riyadh might reach some kind of a deal at Russia’s expense. The Kremlin remains highly suspicious of U.S. intentions.
Still, the Putin-Trump call “could be a good first step toward a new oil deal,” said Alexander Dynkin, president of the Institute of World Economy and International Relations in Moscow, a state-run think tank that advises the government on foreign policy and the economy. “Trump can’t really offer anything to Putin or the Saudis, but he can play a role of a mediator. Both sides need some face-saving solution.”
According to Kortunov, the recession in major economies caused by coronavirus could change the calculation for Russia in the oil war because it’s squeezed energy revenues even tighter. “It’s dashed hopes that oil prices could recover in a few months and longer-term it will curb demand for hydrocarbons,” he said.
Putin and Trump Monday agreed that “current oil prices aren’t in the interests of our countries,” Kremlin spokesman Dmitry Peskov said Tuesday, declining to give any details on what they might do to change the situation.
‘Tough Situation’
The presidents ordered their energy ministers to begin consultations on the oil market but made no mention of involving Saudi Arabia. Trump said before Monday’s call that he doesn’t want to see the U.S. energy sector “wiped out” after Russia and Saudi Arabia “both went crazy” and launched into a conflict that depressed oil prices.
Russian officials continue to say publicly that plunging oil prices are “very unpleasant” but not a catastrophe, given the country’s low debts and ample currency reserves. So far, the Kremlin has shown no sign of willingness to patch up relations with Saudi Arabia following the breakdown of its production limit agreement with the Organization of Petroleum Exporting Countries.
But the longer prices plumb lows, the deeper the pain in Moscow. Deputy Energy Minister Pavel Sorokin said last week that Russia had expected that oil prices would collapse to $30 per barrel on the collapse of OPEC+ deal. While crude clawed back some losses Tuesday, Brent and West Texas Intermediate futures remain around $20 a barrel. Russia’s budget falls into deficit when prices fall below $40 for Urals blend, which is now trading below $20.
Trump has so far unsuccessfully reached out to Saudi leaders to reconsider their strategy, which represents a major threat to producers in the U.S. because of the rock-bottom prices.
But both Moscow and Riyadh are under increasing pressure to find a way out of the conflict, said Alexey Potemkin, the chief executive officer of Moscow Policy Group, a consultancy group focused on Russia-Gulf ties.
“A few weeks ago, there was no understanding that the consequences of coronavirus will be so harsh,” he said. “We’re in a very tough situation.”
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