US vs OPEC "Oil War" (trade war)?

[a_majoor]

All kinds of motivations at play here, and not all of them are in alignment.

Saudi Arabia wants to use low oil prices to keep Iran from getting the financial resources to become regional hegemon, and also to hurt Iranian allies and proxies who need petrodollars to assist Iran (which turn out to be Russia and Syria).

However, Saudi Arabia also spends $100 billion/year running its elaborate welfare system, and their sovereign wealth fund will run out in five to seven years, depending on what assumptions you make. Paying groups like ISIS through the back door in order to have a proxy army to strike Iranian interests isn't cheap either.

Russia's economy requires oil at $100/barrel to keep paying for both its internal needs and foreign military adventures. Even pushing the price of oil over $50 will stem the bleeding. (Although there is no mention of this anywhere, I wonder if there might be some sort of quid pro pro in the background; i.e. Russia backs off supporting Syria and Iran in return for Saudi Arabia supporting oil prices).

Iran, of course, is desperate for new revenues in order to keep its population pacified while also paying for their own expensive quest for regional hegemony. Since they are trying to do it the old fashioned way with developing nuclear weapons, conventional military and political power, they must be burning through cash at an incredible rate. Western air strikes against ISIS actually help the Iranians preserve resources, reducing the number of airstrikes the Iranians have to undertake against ISIS on their own.

While low oil prices also hurt American and Canadian oil producers, this is really collateral damage (and acceptable damage at that) so far as the Saudis are concerned.

The ideal for the Saudis would be to somehow finesse oil prices to stay around $50/bbl to ease their own cash burn while not allowing their enemies to benefit too much.

 

[daftandbarmy]

All kinds of motivations at play here, and not all of them are in alignment.

Saudi Arabia wants to use low oil prices to keep Iran from getting the financial resources to become regional hegemon, and also to hurt Iranian allies and proxies who need petrodollars to assist Iran (which turn out to be Russia and Syria).

However, Saudi Arabia also spends $100 billion/year running its elaborate welfare system, and their sovereign wealth fund will run out in five to seven years, depending on what assumptions you make. Paying groups like ISIS through the back door in order to have a proxy army to strike Iranian interests isn't cheap either.

Russia's economy requires oil at $100/barrel to keep paying for both its internal needs and foreign military adventures. Even pushing the price of oil over $50 will stem the bleeding. (Although there is no mention of this anywhere, I wonder if there might be some sort of quid pro pro in the background; i.e. Russia backs off supporting Syria and Iran in return for Saudi Arabia supporting oil prices).

Iran, of course, is desperate for new revenues in order to keep its population pacified while also paying for their own expensive quest for regional hegemony. Since they are trying to do it the old fashioned way with developing nuclear weapons, conventional military and political power, they must be burning through cash at an incredible rate. Western air strikes against ISIS actually help the Iranians preserve resources, reducing the number of airstrikes the Iranians have to undertake against ISIS on their own.

While low oil prices also hurt American and Canadian oil producers, this is really collateral damage (and acceptable damage at that) so far as the Saudis are concerned.

The ideal for the Saudis would be to somehow finesse oil prices to stay around $50/bbl to ease their own cash burn while not allowing their enemies to benefit too much.

By curious accident of history and geography, the world's major energy resources are located pretty much in Shiite regions. They're a minority in the Middle East, but they happen to be where the oil is, right around the northern part of the Gulf.

Noam Chomsky

Read more at http://www.brainyquote.com/quotes/keywords/middle_east.html#GcpA6ZDAPxytSos4.99

 

[CougarKing]

The Saudis slowly realizing their agenda of putting US frackers out of business?

Forbes

Apr 3, 2016 @ 11:02 AM 32,822 views
Saudi Arabia's Last Weapon In The Oil War

Panos Mourdoukoutas ,

Contributor

Opinions expressed by Forbes Contributors are their own.

Saudi Arabia may soon have to use its last weapon in an all out war against American Frackers, and the Iranian and Russian oil producers: Break the riyal peg to the US dollar.

For almost three years, the Kingdom has been using a conventional weapon for fighting the oil war: raising oil output. The logic of using this conventional strategy was quite simple: let higher output crush oil prices, and the Kingdom’s antagonists along the way, as I discussed in a previous piece here.

Now there’s plenty of evidence that this weapon has hit the target. US oil rigs have been shutting down one after another, and weak American frackers have been going out of business or striving to cope with falling revenues and piles of debt.

(...SNIPPED)

 

[Colin Parkinson]

But for how long, the Pandora's box has been opened and Saudi can only contain it by hurting itself.

 

[Flavus101]

They cannot sustain low oil prices forever. Once their output drops and prices go up space is created in the market again for these small companies to come back in and fill it. This is a short term bandaid solution.

 

[Good2Golf]

I thought the prevailing wisdom is that Saudi Arabia as a State will run short of its national reserves before the economic impact to small-cap frackers in the US becomes more than a 'nuisance' to the Big Dogs?  ???

 

[Kirkhill]

The Saudis slowly realizing their agenda of putting US frackers out of business?

Forbes

On the other hand I am aware of people buying up wells at pennies on the dollar.  Some are already making money on their investment.

 

[a_majoor]

There is a fair bit of analysis in the "$60/barrel by year end" thread which suggests that many American frackers can continue to operate profitably at $30-40/bbl. And "Fracklogging" means that there is plenty of capacity in pre drilled wells simply waiting for price signals to reach the proper point to put the wells into production (or restart them).

Allowing the price of oil to rise might provide a bit of short term relief to the Kingdom, but it also undermines their local strategy to starve arch rival Iran of oil revenues as well as put a hit on Iranian allies (Syria, Russia). If they stay the course for five years they exhaust their cash reserves, but will probably be patting the Iranians on the face with a shovel, and looking over the economic wreckage of Russia and Syria. The issue here is how committed they are to their own long term strategy, and do they have the means of handling second and third order effects of their strategy within the Kingdom itself?.

The Saudis can try to manipulate the market, but the Invisible Hand will wrestle them to the ground.

 

[Good2Golf]

I bet they'll blink...

 

[TCBF]

I bet they'll blink...

- They will have to. Some of the new-tech plants in Alberta can bring in oil sands bitumen at less than $15/bbl. They are the future. The Saudis will not be competitive.

 

[Kirkhill]

- They will have to. Some of the new-tech plants in Alberta can bring in oil sands bitumen at less than $15/bbl. They are the future. The Saudis will not be competitive.

And the really neat part is that the oilsands companies don't need to "explore" for the oil.  They know where it is. 

 

[CougarKing]

More Saudi threats as Doha approaches, while the Iranians go their own way:

Market Watch

Saudi prince says country could unleash a million barrels of oil a day

Published: Apr 18, 2016 2:44 a.m. ET

By
BARBARA
KOLLMEYER
MARKETS REPORTER

Ahead of the failed Doha, Qatar, oil meeting, a key Saudi prince said his country had the capacity to unleash a million barrels of oil a day on the market, while reiterating a “we won’t freeze if everyone else doesn’t” stance.

Deputy Crown Prince Mohammed bin Salman, also chairman of the supreme council of Saudi Arabian Oil Co., said his country could up oil output to 11.5 million barrels a day right away, and then to 12.5 million in six to nine months, if it so desired.

The comments were reportedly made in an interview with Bloomberg that was published on Saturday. In the interview he reportedly added that, if the country invested in its production capacity, the daily production number could reach as much as 20 million barrels.

(...SNIPPED)

International Business Times

Oil Prices: Iran Pulls Out Of Doha Summit, Set To Reach Production Limit
By Marcy Kreiter @marcykreiter On 04/16/16 AT 10:23 AM

UPDATED: 11:50 a.m. EDT — Saudi Deputy Crown Prince Mohammed bin Salman on Saturday cast doubt on the prospects for Sunday’s oil summit in Doha, Qatar, saying Riyadh could boost output immediately and double it long-term, Bloomberg reported.

The prince, who is second in line to the throne and a top oil official, said his country would not cut back output unless other major producers agreed to do so.

“If all major producers don’t freeze production, we will not freeze production,” he said. “If we don’t freeze, then we will sell at any opportunity we get.

(...SNIPPED)

----------------------------------------------

Plus more effects of the world oil glut on global maritime traffic:

Business Insider UK

There's a huge traffic jam of oil tankers off Iraq's coast
Charles Kennedy, OilPrice.com
Apr. 10, 2016, 2:04 PM 5,263

Oil tankers are caught in a traffic jam near the Iraqi port of Basra, causing delays in loading. According to Reuters, around 30 very large crude carriers (VLCCs) are sitting in the Persian Gulf, and the backlog could cost ship owners more than $75,000 per day. Some could be waiting for weeks to reach the port.


The culprit is high oil production in Iraq. The port at Basra is struggling to load up all the oil tankers fast enough, forcing some to sit and wait. Iraq exported about 3.26 million barrels per day (mb/d) in March from its southern coast, which is up from just 2.5 mb/d in 2010.

And the line of tankers appears to be growing. The gridlock is forcing up the cost of renting an oil tanker. That, combined with the shrinking capacity of available storage in China is pushing up tanker rates in Asia as well. Shipping data shows that VLCC rates have doubled from $37,250 per day to $74,700 per day.

(...SNIPPED)

Reuters/Yahoo Finance

Band plays on, as global oil glut leaves supertankers in a huge jam
By Keith Wallis and Henning Gloystein
April 12, 2016

By Keith Wallis and Henning Gloystein

SINGAPORE (Reuters) - It may be the world's biggest traffic jam.

As ports struggle to cope with a global oil glut, huge queues of supertankers have formed in some of the world's busiest sea lanes, where some 200 million barrels of crude lies waiting to be loaded or delivered.

The vessels, filled with oil worth around $7.5 billion at current market prices, would stretch for almost 40 km (25 miles) if formed up in one straight line.

One captain with more than 20 years at sea told Reuters his tanker had been anchored off Qingdao in northeastern China since late March and was unlikely to dock before the end of this week, a frustrating delay of more than three weeks.

(...SNIPPED)

 

[Kirkhill]

A very interesting site that portrays key economic indices as actual roller coaster rides: 

http://www.chartcoaster.com/


This is the one for oil from 1946 to 2015.

There are others for gold, interest rates and gasoline from circa WW1 to the present.

The thing that intrigues me is how much long term stability there is when you look at prices and rates in terms of 2014 dollars (in other words discounted for inflation) vice the short term volatility.

 

[jollyjacktar]

The Saudi's are looking to borrow $10B.  http://www.dailymail.co.uk/news/article-3549262/Saudi-Arabia-close-securing-10-billion-bank-loan-sources.html

I'd love to see them go broke like Venezuela.

 

[CougarKing]

Putin's move:

Reuters

In riposte to Riyadh, Russia says ready to ramp up oil output

By Olesya Astakhova, Denis Pinchuk and Dmitry Zhdannikov | Reuters – Wed, 20 Apr, 2016 6:12 PM EDT


MOSCOW (Reuters) - Russia said on Wednesday it was prepared to push oil production to historic highs, just days after a global deal to freeze output levels collapsed and Saudi Arabia threatened to flood markets with more crude.

Venezuela predicted prices could crash in the next few weeks if producers failed to resume dialogue and urged that non-OPEC participants be observers at a June OPEC meeting, as the specter of oversupply loomed once more.

(...SNIPPED)

 

[Good2Golf]

House of Saud v. Vlad...hmmmm

op:

 

[Kirkhill]

If the Saudis run true to form they are going to need Mercs.....

 

[a_majoor]

Russia and Iran ramping up oi production might give them a short term boost in terms of cash-flow, but fails to solve (and indeed exacerbates) the longer term issue of the collapse of their petrodollar dependency. In any realistic scenario, Russia's grandly announced plans for military modernization runs into a shortfall of money, meaning that they will have to start making complex tradeoffs in their domestic economy, foreign policy and military strategy. The "frozen conflicts" in Ukraine and around the edge of the Near Beyond will come back to bite them pretty hard if they still need to keep funding their puppet rebel armies and support them with Russian firepower and advisors.

Iran is also spending resources wildly in order to prop up Syria and maintain their "Shite Arc" from Iran to Lebanon, and competing with two other would be Hegemons in the region (Turkey and Saudi Arabia) is bound to be pretty cash flow intensive as well. ISIS propaganda already makes the point that the long term goal is to fight Apostates as well as "Infidels and Crusaders", so the Saudis and Turks have their weapon in place to disrupt the Iranian plans and goals.

 

[CougarKing]

A bit premature to declare this?

Business Insider

OPEC is dead

    Irina Slav, OilPrice.com

    May 15, 2016, 10:08 PM 6,061

Qatar Oil Minister Mohammed bin Saleh Al-Sada, former Saudi Oil Minister Ali al-Naimi, United Arab Emirates Energy Minister Suhail bin Mohamed al-Mazroui and Kuwaiti Oil Minister Ali Saleh al-Omair (R) attend the opening session of the 10th Arab Energy Conference in Abu Dhabi, on December 21, 2014.

OPEC is dead, Rosneft’s head Igor Sechin has told Reuters. In a fine example of stating the obvious – at least to those who have been keeping an eye on the energy industry – and putting it in context, the chief of Russia’s largest oil company welcomed an era where the oil market will be driven by “finance, technology and regulation.”

Russia and OPEC are natural rivals, although there has been a sense of partnership, especially after the advent of shale in the U.S., when both started pumping more and more crude to preserve their market share.


(...SNIPPED)

Philippine Star

Saudi Arabia ousts longtime oil minister
(Associated Press) | Updated May 8, 2016 - 2:16am

DUBAI — Saudi Arabia on yesterday announced the ouster of its longtime oil minister as part of a larger ongoing government shakeup.

A royal decree announced that Ali al-Naimi has been replaced by former Health Minister and Saudi Aramco board chairman Khaled al-Falih.

Al-Naimi has long been a pillar of Saudi oil policy, leading the Ministry of Petroleum and Mineral Resources since 1995. Prior to that role he'd served as the president of oil giant Aramco.

Under a new Saudi leadership led by King Salman, the king's son Deputy Crown Prince Mohammed bin Salman has largely been overseeing Saudi economic policy along with a handful of new ministers. The changes announced yesterday come as the government plans wide-ranging reforms aimed at overhauling the Saudi economy amid lower oil prices that have eroded state revenues.

(...SNIPPED)

 

[larry Strong]

You have to wonder, if they are contemplating using IOU's.......

http://business.financialpost.com/news/energy/saudi-arabia-considers-paying-contractors-with-ious-amid-projected-budget-deficit-brought-on-by-oil-slump?__lsa=26e5-72cf



Cheers
Larry