Would an end to the Ukraine war be bad news for Saudi Arabia and oil prices?

Hungarian Prime Minister Viktor Orbán is one of former U.S. President Donald Trump's closest allies in Europe. In February of this year, Orbán stated that the United States could end the war in Ukraine within six months.

The United States' attempt to restore relations with Russia and end the war has shocked Europe. Gulf Arab states will closely monitor the potential impact on energy prices and oil trade, as these factors are critical to their economies.

Oil-rich Gulf states are directly affected by U.S. and EU sanctions against Russia. Russia and Saudi Arabia jointly lead an alliance of oil-producing countries called "OPEC+." This alliance plays a significant role in global oil production and pricing.

A swift end to the war in Ukraine could mean a decline in the prices of commodities, including oil, metals, and the natural gas needed for production. The interconnectedness of these commodities highlights the potential impact of geopolitical events on global markets.

Viktor Katona, lead oil analyst at intelligence firm Kpler, told Middle East Eye: "The normalization of relations with Russia would greatly facilitate the reduction of commodity prices. A large number of commodity markets would become easily accessible again." Of course, this depends on the U.S. lifting sanctions on Russia. The Trump administration has been fairly transparent since negotiations with Russia began in Saudi Arabia this week, stating that as part of a broad agreement to end the war in Ukraine, the U.S. would halt sanctions.

U.S. Secretary of State Marco Rubio stated: "Sanctions are all a result of this conflict. To end any conflict, all parties must make concessions." This perspective emphasizes the need for compromise and negotiation to achieve a lasting resolution to the conflict.

Analysts at Bank of America said in a report this week that a peace agreement in Ukraine could mean a $5 to $10 per barrel drop in Brent crude prices. Considering current prices, this is a significant decline. Such a drop would have substantial implications for the global energy market.

As of Friday afternoon, Brent crude was down 2% at $74.96 a barrel. Katona said ending the war in Ukraine is "bearish" for oil prices. This indicates a negative outlook for oil prices if the conflict were to end.

"Russia will not produce more oil because they don't have much spare capacity, but the system will become more predictable. Oil prices will be cheaper by the end of 2025 than they are now," he said. This suggests that while production may not increase, market stability could lead to lower prices in the long term.

Energy consultant Greg Priddy stated: "There is not a large amount of Russian oil that has been reduced in the market. It has simply been diverted." This implies that the impact of sanctions on Russian oil supply has been limited due to rerouting of exports.

For Gulf countries, especially Saudi Arabia, this is bad news. The International Monetary Fund says Saudi Arabia needs oil prices to be around $96 a barrel to balance its budget. That number has been rising as Saudi tries to control supply to prop up prices. The kingdom's fiscal stability is increasingly dependent on high oil prices.

Saudi Arabia's break-even price is higher than its "friends" in OPEC and its growing geopolitical rival, the United Arab Emirates. Saudi Arabia is pouring billions of dollars in oil revenue into expensive mega-projects designed to reduce future reliance on energy and diversify its economy. Riyadh has had to scale back some projects, such as the futuristic mega-city Neom. Saudi officials now expect fewer than 300,000 people to live there by 2030, instead of 1.5 million.

The Biden administration has been unhappy with Saudi Arabia's decision not to release more oil during the war in Ukraine. A former senior U.S. intelligence official echoed the views of many colleagues, telling Middle East Eye that Riyadh is "on the opposite side of us (the U.S.), supporting Russia's economy." This highlights the tensions between the U.S. and Saudi Arabia regarding their respective approaches to the conflict.

Even Trump, who has a good relationship with Crown Prince Mohammed bin Salman and has spoken of economic cooperation with Russia once the war in Ukraine ends, called on Saudi Arabia in January to flood the market with oil. "If the price goes down, the Russia-Ukraine war will end immediately. Now, the price is high enough that this war is going to continue - you have to get the price down," Trump said. Logically, Saudi Arabia has no interest in depressing the price of its main export for the policy benefit of the U.S.

Trump is still pushing for a Ukraine peace deal, and oil prices are roughly where they were when he made those comments in January. Oil prices were around $76 a barrel at the start of 2022, spiking above $100 when Russia invaded Ukraine, but are down more than 20% in the past three years. Russia invaded Ukraine on February 24, 2022.

Greg Priddy, an energy consultant at Spout Run Advisory in Washington, told Middle East Eye that ending the war in Ukraine could be neutral for oil prices. Because Russian supply has not fallen dramatically, lifting sanctions on Russia does not mean a flood of oil onto the market to depress prices. "There is not a large amount of Russian oil that has been reduced in the market. It has simply been diverted. The price cap is not working very well," he said, adding that China and India have been gobbling up Russian crude.

Those who stand to lose the most from an end to sanctions are ship owners, who have profited from war risk premiums being passed on to Russia. Tankers have been in short supply and freight rates have risen as Russian crude takes circuitous routes to its destination. "Western sanctions have tightened what was an oversupplied tanker market. So if you are a tanker owner, this is bad," Priddy said.

Western sanctions have created a series of knock-on effects. The U.S. kicked Russia out of Swift, the dollar-dominated global financial messaging system. In response, Russia has taken steps to insulate itself from the dollar-based trading system. Russian oil bound for China is transported via its far eastern border. That trade has shifted into the yuan. Analysts say China has no incentive to bring that trade back into dollars.

U.S. Treasury Secretary Scott Bessent said: "We have to make sure that the dollar remains the world's reserve currency." The importance of maintaining the dollar's dominance in global finance is a key concern for the U.S.

For other clients, Russia is using proxy currencies for the dollar. The UAE is a big beneficiary. It has become a hub for Russian oil trade. For example, India has started buying Russian crude in UAE dirhams, which are pegged to the dollar to maintain stability. The rise of the dirham as a proxy for the dollar in Russian oil trade has earned UAE banks billions. If the U.S. opens the door for Russia to return to the dollar-based system, Dubai's status as the "new Geneva" for Russian oil trade could be undermined.

The Trump administration and its allies in the media have constantly highlighted what they see as the threat that sanctions pose to the dollar's status as the world's reserve currency. U.S. Treasury Secretary Scott Bessent said at his Senate confirmation hearing: "We have to be careful how we deploy sanctions... and it's critical. We have to make sure that the dollar remains the world's reserve currency."

Saudi Arabia hopes an end to U.S. sanctions would allow it to regain market share in China. In 2024, Russian exports to China hit record highs, while Chinese purchases of Saudi crude fell by 9%. But analysts say this is unlikely to happen. Katona said Russian crude trades at a $4/barrel discount to Saudi crude. If the U.S. lifts sanctions, the Russians may undercut prices and still be cheaper than Saudi Arabia. China also has the added advantage of trading with Russia in yuan.

Another important determinant is Europe. The EU still imports some Russian gas but has fully banned seaborne Russian crude and refined oil products. Katona said: "Europe will not buy Russian crude again." Priddy said we could see a divergence between the EU and the U.S. "Europe and the U.S. could go different ways on sanctions. I don't see the EU taking back Russian crude," he said.

Of course, there are other ways for EU countries to import Russian crude. If the U.S. relaxes sanctions, this would allow Turkey to more freely import Russian oil, refine it and resell it to European countries. It's essentially doing the same thing with Russian gas via the TurkStream pipeline. In January, Russian gas supplies to Europe via the TurkStream pipeline hit record highs.

Saudi Arabia relies on Chinese refiners to buy its oil. It's also invested in downstream production there. But the Chinese economy is slowing, and analysts are questioning whether it has reached peak oil demand. If Saudi Arabia can't squeeze Russia out of the Chinese market, that leaves just one other competitor, the Islamic Republic of Iran. Trump has vowed to reinstate his "maximum pressure" campaign against Iran. Last month, Reuters reported that China's state-owned Shandong Port Group decided to start blocking tankers under U.S. sanctions. This is a huge blow to Iran, which ships most of its oil to China via its aging shadow fleet. Katona said: "Saudi Arabia's opportunity is for the U.S. to remove Iranian oil exports. That is a golden opportunity."