Any weakening of Russian support for Mr. Assad could be one of the first signs that the recent tumult in the oil market is having an impact on global statecraft. Saudi officials have said publicly that the price of oil reflects only global supply and demand, and they have insisted that Saudi Arabia will not let geopolitics drive its economic agenda. But they believe that there could be ancillary diplomatic benefits to the country’s current strategy of allowing oil prices to stay low — including a chance to negotiate an exit for Mr. Assad.

That’s a quote from a New York Times article that ran in February of this year.

At the time, we pointed to the piece as evidence that yet another conspiracy “theory” has become conspiracy “fact” as it effectively served to validate (to the extent The New York Times is validation) the thesis that at the end of the day, this is all about energy.

If the Saudis could use oil prices to force Moscow into ceding support for Bashar al-Assad in Syria, then the West and its regional allies could get on with facilitating his ouster by way of arming and training rebels. Once Assad was gone, a puppet government could be installed (after some farce of an election that would invariably pit two Western-backed candidates against each other) then Riyadh, Doha, and Ankara could work with the new government in Damascus to craft energy deals that would not only be extremely lucrative for all involved, but would also help to break Gazprom’s iron grip on energy supplies to Europe.

Those are the “ancillary diplomatic benefits” mentioned in The Times piece.

Only it didn’t work out that way.

Instead, Russia just kind of rolled with the economic punches (so to speak) and while there’s probably only so much pain Moscow can take between low oil prices and Western sanctions, Putin has apparently not yet reached the threshold.

Meanwhile, the Saudis have found that it’s taking longer than expected for Riyadh to realize another expected benefit from driving crude prices into the floor. Bankrupting the relatively uneconomic US shale space would go a long way towards solidifying Saudi Arabia’s market share, but thanks to wide open capital markets, Riyadh has effectively gotten itself into a war with the Fed. The longer ZIRP persists, the longer otherwise insolvent US producers can stay in business. In short: until the cost of capital starts to rise, there will likely still be investors of some stripe willing to finance some of these drillers.

Additionally, Riyadh decided to fight a proxy war with Iran in Yemen and combined with the necessity of maintaining the status quo in terms of the lifestyle of the everyday Saudi, the kingdom is literally going broke as the budget deficit is set to come in at an astounding 20% of GDP and the current account plunges into the red as well.

As for the Russians, not only did they not abandon their support for Assad, they in fact struck up a closer alliance with Iran, whose oil supply threatens to add to the global deflationary supply glut once sanctions are fully lifted (by the way, Sunday is “Adoption Day” for the nuclear deal), on the way to restoring the Assad regime in an all-out military invasion.

Adding insult to injury (or “energy” as it were), Russia briefly topped the Saudis as the top supplier of crude to China in May.

In other words, the Saudi gambit has been a miserable failure thus far and although they may be able to outlast the US shale space, the battle is nearly lost in Syria. All of this helps to explain why now, Riyadh is looking to muscle in on Moscow’s crude market share in Eastern Europe. Here’s Bloomberg with more:

As President Vladimir Putin tries to restore Russia as a major player in the Middle East, Saudi Arabia is starting to attack on Russia's traditional stomping ground by supplying lower-priced crude oil to Poland. At a recent investment forum, Igor Sechin, chief executive of Rosneft, Russia's biggest oil company, complained about the Saudis' entry into the Polish market. "They're dumping actively," he said." In the 1970s, Saudi Arabia sent half of its oil to Europe, but then the Soviet Union built export pipelines from its abundant West Siberian oil fields, and the Saudis switched to Asian markets, where demand was growing and better prices could be had. The Saudi share of the European crude market kept dropping; in 2009, it reached a nadir of 5.9 percent. Russia's share peaked at 34.8 percent in 2011. In recent years, Saudi Arabia slowly increased its presence, reaching a 8.6 percent share in 2013, but it had never tried its luck in Poland. Like most of central and eastern Europe, Poland has long been a client of Russian oil companies. Last year, about three-quarters of its fuel imports came from Russia, with the rest from Kazakhstan and European countries. Poland, however, is at the center of efforts to reduce the European Union's dependence on Russian energy. A new and reliable supplier is a godsend. As for the Saudis, they need to expand outside Asia where demand is falling. This could turn into a more active shoving match between the world's two biggest oil exporters, which already are at odds over the Syrian conflict. If the Chinese economy continues performing worse than expected, that market may become too small for the Russians and the Saudis. Oil competition is a dangerous undercurrent in Putin's Middle Eastern policy. The Russian leader hopes that when its ally Iran re-enters the global oil and gas market, Russia will somehow share in the profits, perhaps through new pipelines across Syria. He also wants to stop the Saudis from establishing export routes in Syria. Now that Russian energy supremacy in Europe also is at stake, Putin's determination to resolve the Syrian conflict on his terms can only grow.

Note that the last bolded passage above reinforces everything we've been saying about the conflict in Syria from the beginning and even serves to underscore the suggestion that in addition to supplanting Washington as Mid-East superpower puppet master, Moscow has likely also struck some manner of deal with Tehran on future energy projects in Syria. Recall what we said late last month:

What Putin’s role ultimately would be in the Iran-Iraq-Syria line isn’t entirely clear but the project would compete with the Southern Gas Corridor, which is obviously good for Russia and it seems likely that in one way or another, Moscow, via its influence in Tehran and Damscus, would end up benefiting. Indeed, the fact that Assad signed an MOU for the Islamic Pipeline shortly after citing Gazprom's interests in rejecting the Qatar-Turkey line certainly seems to suggest that Russia had already negotiated for a piece of the pie.

More, from Reuters:

From global majors such as Shell and Total to more modest Polish energy firms, oil refiners in Europe are cutting their longstanding use of Russian crude in favor of Saudi grades as the world's top exporters fight for market share. Russia has for years been muscling in on Asian markets where Saudi Arabia was once the unchallenged dominant supplier. But now Riyadh is retaliating in Moscow's backyard of Europe with aggressive price discounting. This is likely to complicate further a dialogue between Moscow and the OPEC exporters' group on tackling the global oil glut, with joint production cuts already looking elusive. Trading sources told Reuters that majors such as Exxon, Shell, Total and Eni have been all buying more Saudi oil for their refineries in Western Europe and the Mediterranean in the past few months at the expense of Russian oil. "I'm buying less and less Russian crude for my refineries in Europe simply because Saudi barrels are looking more attractive. It is a no brainer for me as Saudi crude is just cheaper," said a trading source with one major, who asked not to be named because he is not allowed to speak to the media. Two trading sources said Saudi Arabia was looking at storing crude in Gdansk so that it can supply eastern European customers more quickly, just as it has done for years for western European clients from ports in the Netherlands or Belgium. One trader said supplies from Gdansk could be sent to Germany to compete with Russian crude sent down the Soviet-built Druzhba (Friendship) pipeline. The competition is likely to intensify in the next few months as Iran, which supplied between five and 10 percent of Europe's crude before 2012, is set to return with large volumes if and when Western sanctions on Tehran are lifted. "The Saudis want to secure the market share before Iran comes back," said a trading source with an oil major.

And here’s Sputnik with the Russian point of view:

Saudi Arabia has started delivering oil to the Polish market at a discount in an attempt to boost its market share, Rosneft boss Igor Sechin told a forum in Moscow on Tuesday. "Returning to the competition, I want to say what we are seeing at the moment. Saudi Arabia has for the first time entered even the Polish market, delivering oil to Gdansk. They are actively dumping [the price]." "The battle for the market is one of the factors that affect the price of oil," said Sechin, who promised to "make every effort to prevent a decrease in our share of supplies." Speaking at the 'Russia Calling!' annual investment forum, Sechin explained that Rosneft is able compete with competitors in terms of production prices, which average at around $4 a barrel, in part thanks to the weak ruble. According to reports, Saudi Aramco began the deliveries on September 21, in order to gain access to a new market in Europe before Iran returns to the market in the wake of sanctions being lifted from its oil exports. Last month Saudi Aramco cut all prices for October deliveries to Northwest Europe and the US, and reduced the premium on its main Light grade to Asia by 30 cents per barrel.

As you can see, all of this is inextricably connected. The above represents the intersection of i) energy, ii) geopolitics, iii) the global economic slowdown as exemplified by China's hard landing, and iv) monetary policy.

Now that Russia and Iran have cemented their alliance and look set to control the future of Syrian politics, the Saudis are rushing to establish a foothold in traditionally Russian-dominated markets. Both Moscow and Riyadh will suffer if Chinese demand doesn't rebound swiftly or worse, continues to decline. Meanwhile, as long as the cost of capital is zero, at least some uneconomic US supply will likely remain online, pressuring prices further and perpetuating the entire dynamic.

The question now, is how long it will be before Riyadh gets desperate enough to attempt to turn the tide in Syria in favor of the Sunni extremist groups battling Moscow and Tehran.

Should the Saudi-UAE-Qatar coalition fighting Iran's proxy army in Yemen decide to get involved in Syria in a last ditch effort to protect their energy interests and counter what will likely morph from a Russia-Iran military nexus into a Russia-Iran energy nexus once the war is over and sanctions on Tehran lifted, then the fireworks will begin in earnest.