02/10/17

HOW DOES THE END OF THE FILIBUSTER AND 2014 OPEC ACTION RELATE?

By: Kent Engelke | Capitol Securities
From: 2/2/17

Will history regard Senator Reid’s 2013 ending of the Senate filibuster and the 2014 OPEC decision to flood the world with oil as two of the worst political calculations in recent history? Both have the potential to have an infinite number of unintended consequences as the intermediate future did not materialize as expected.

Commenting about the former, in 2013, the Democratic Party was convinced that it would maintain control of the Senate, win the White House in 2016 and perhaps regain control of the House. Senate Majority Leader Reid pushed through a procedural change that had previously prevented a simple majority ruling for many Presidential appointees. Under the newly passed regulation, only 51 votes were required for approval versus the historical 60.

It appears the Trump Administration will utilize this procedural change to confirm his cabinet appointees and perhaps the nomination to the Supreme Court, the proverbial nuclear option.

For the record, I am in favor of returning the filibuster.

How will the electorate view Democratic insistence of delaying Trump’s picks, a delay which at this juncture is viewed as symptomatic of everything that is wrong in Washington? Will this view change and Trump next be viewed as a proverbial bully by obtaining Senate approval by a change in the approval process that was instigated by the former majority?

As noted yesterday, Trump is a nationalist populist who ardently believes the people, not the government, make better decisions for the country. The majority of the electorate shares this view given the dominance of the Republican party in most levels of government, in some regards the greatest dominance in history.

And then there is OPEC. According to industry reports, there is 88% compliance with the production cuts. Many thought the inverse would occur. Moreover, Saudi Arabia and other cartel and non-cartel members have stated they would reduce production even more if conditions warranted.

I will argue OPEC et.al. does not have any choice other than to reduce production given the lack of infrastructure spending and large demands for monies to fund their entitlement programs. Many OPEC members require oil over $90 barrel to fund their needs.

The above has large implications for the markets. The proverbial animal spirits have been released believing Trump can reduce the power of today’s Administrative State. This releasing of spirits is a major reason for the recent market advance.

Regarding OPEC, will oil double again, the result of stronger demand and lower production as was the case in 1999? As noted many times, the similarities to that era and to today are uncanny. How will such events affect inflationary expectations?

Speaking of which, the Fed ended its two day meeting. As expected, there was no change in monetary policy, but acknowledged rising confidence among consumer and businesses following Trump’s victory.

The Committee reiterated their expectations for moderate economic growth, “some further strengthening” in the labor market and a return to 2% inflation. Policy makers gave little direction on when it might next raise borrowing costs, as officials grapple with the uncertainty created by the new administration. However there was little to alter the prevailing wisdom that there will be at least three increases in 2017.

Markets were relatively unchanged following the Fed’s announcement, thus suggesting it was essentially a non-event.

Last night the foreign markets were mixed. London was up 0.62%, Paris up 0.22% and Frankfurt unchanged. China was closed for a holiday, Japan down 1.22% and Hang Sang down 0.57%.

The Dow should open nominally lower on economic and political concerns. The 10-year is unchanged at 2.47%.

11/3/16

Can Oil Markets Survive An OPEC Implosion?

A technical meeting that was supposed to iron out some wrinkles for a deal to cut oil production ended in acrimony over the weekend, and OPEC’s effort at coordination could be at yet another impasse.

Following the Algiers agreement at the end of September, a tentative deal that called for a collective reduction in oil output in the range of 200,000 to 700,000 barrels per day, OPEC scheduled a meeting on October 28-29 in Vienna to put some meat on the bones of the pact so that it could be officially sealed at the end of November.

But after weeks of papering over differences between its members and trying to put some positive spin on the prospects for a deal, OPEC not only failed to agree on individual production quotas, but its members also bickered over data and even which countries are supposed to participate. The group spent two days negotiating, and came away with nothing more than a statement that said they would continue talking.

The biggest hang up at this point is Iraq, which has two fundamental complaints. First, Iraqi officials dispute the data being used to calculate its oil production levels, arguing that the sources OPEC is using for its official estimates are underestimating Iraq’s output. That would hamstring Iraq more than it feels is fair, forcing it to cut deeper under the deal.

More importantly, Iraq is demanding an exemption from the deal entirely, arguing that it should be allowed to produce as much as possible because of its costly war against the Islamic State. Iran, Nigeria and Libya have been granted exemptions, due to the effect of sanctions (Iran) and disrupted supply because of security issues (Nigeria and Libya) – Iraq wants the same treatment.

That resulted in some friction at the Oct. 28 gathering in Vienna, a meeting that reportedly stretched on for 12 hours. As the WSJ notes, the success of this type of agreement at the end of November tends to require a consensus from lower-level officials ahead of time, something that did not occur this past weekend. That casts some serious doubt on the viability of the overall deal. On Oct. 29, another meeting with non-OPEC producers such as Brazil, Russia, Azerbaijan, Mexico, Oman and Kazakhstan, also ended with very little progress and zero commitments. Moreover, non-OPEC countries will have little impetus to offer any concessions if OPEC itself cannot come to terms. Russia said upfront that it would not cut its production, and it would only freeze if OPEC agreed to cut first.

The challenges standing in the way of the deal were evident right after the Algiers announcement at the end of September. Getting all members on board for a production cut was always going to be an uphill battle. But after this weekend, the odds of a deal look increasingly grim. “It’s more likely that OPEC will come away with no decision in November than that they’ll reach an agreement,” Fabio Scacciavillani, chief economist at the Oman Investment Fund, told Bloomberg on Oct 30. “If they are able to agree, it will likely be a wishy-washy deal that’s hobbled by too many exemptions.”

With competing interests, the discord seen over the weekend in Vienna was somewhat predictable. And the results of the fallout are predictable too: oil prices dropped more than 1 percent on Monday during early trading, with both WTI and Brent dipping below $50 per barrel and dropping close to one-month lows. Hedge funds and other money managers cut their long positions on oil futures and increased short bets for the week ending on October 25, a sign that the markets are losing confidence in a deal. “The price balloon is deflating in response to increasing doubts that OPEC will deliver a credible agreement on production control,” David Hufton, CEO of brokers PVM Group, told Bloomberg. “The combined OPEC and non-OPEC dance rhythm is one step forward followed by two steps back.”

In fact, the chances of a deal might deteriorate even further in the remaining days before the official meeting at the end of November. OPEC likely increased oil production in October, which would require even steeper cuts than they previously laid out. That could put a deal of any significance entirely out of reach.

By Nick Cunningham of Oilprice.com

Link to original article: http://oilprice.com/Energy/Oil-Prices/Can-Oil-Markets-Survive-An-OPEC-Implosion.html

10/12/16

For How Long Can OPEC Talk Up Oil Prices?

Not a day passes without OPEC making oil and gas headlines, and today is surely no exception. Seemingly in lockstep with OPEC, the market is once again pacified on the promise that changes to the global oil supply glut are a’ comin’.

Yesterday, the Wall Street Journal quoted anonymous sources close to the matter who had it on good authority that the Saudi’s were willing to cut “up to” 400,000 barrels per day (and that they had planned to do so all along, with or without an OPEC agreement). We can assume this figure is off August or September levels, which are near-record highs for the oil-rich country.

Of course, there are 400,000 different possible production cut figures included in this “up to 400,000” range—including a big fat zero—so fundamentally speaking, like so much of the OPEC speak, this could mean nothing.

But this isn’t the first time OPEC chatter or supposition or guesswork has moved markets, and it won’t be the last. Because, as Oilprice contributor Rakesh Upadhyay pointed out back in August, just a month before the freeze was announced, fundamentals aren’t what’s driving the oil market—speculation is. And nothing feeds speculators like OPEC.

As Upadhyay wrote, “Though most analysts agreed that a production freeze was not going to alter the fundamentals, prices rose sharply, with the hedge funds adding record long positions,” as evidenced by the chart below, which shows what happened in February when OPEC cuts were on the table for Doha. Fundamentals didn’t change—the glut wasn’t easing—yet hedge funds and speculation on OPEC rumors drove up prices.

IMG URL: http://oilprice.com/images/tinymce/saap1.png

The hope quickly faded when the Doha meeting fell short of expectations, but prices continued to climb. Then, the market found new hope in the Vienna meeting. We then wondered—this time quite wistfully—if a freeze could… maybe, possibly… happen in that meeting over the summer, much in the same way one might hold onto hope that we might someday win the lotto. Our hopes were dashed yet again—but not before the market reflexively inched up again.

Soon after, Saudi comments, which indicated that a new spirit of cooperation among OPEC members might be taking shape, sending prices upward yet again. An unofficial meeting was announced. Algiers, they said. “Stabilize the market” they said (which can apparently be done with talk, rather than production cuts). Russia chimed in, vacillating between joining the “market stabilization” efforts and not. We asked ourselves, this time ever more cautiously, dare we hope again? Most thought not, but speculators threw caution to the wind, moving markets this way and that on almost a daily basis in response to every utterance regarding the freeze.

Then the announcement came that OPEC had reached a deal. The earth shook, moving markets again— this time by a large percentage—and this time backed up by a more tangible hope.

Meanwhile, the industry scrambled to make sense of what it all meant. How big would the cut be? Which members would do the cutting? How did Saudi Arabia and Iran reach any kind of consensus when they were worlds apart—on multiple fronts? And then there was the ultimate question that had every analyst from here to Venezuela furiously figuring and calculating and refiguring and recalculating: just how high could prices go?

Speculators continued to largely disregard the ins and outs of the deal, which were absent at the time, and we saw markets tick up happily in response.

When the size of the production cut—between 240,000 and 740,000 barrels per day—was announced, one could feel the weight of the disappointment within the industry overall. The analysts wanted more; wanted deeper. Most OPEC members had been scrambling to reach record high oil production leading up to the meeting, some successful. Given current production levels, the small cut was seen by most analysts as a mere token gesture that would do very little to address what most would agree is the reason behind the price “problem”—the global supply glut.

And further skepticism surfaced over the fact that no specific member had agreed to any specific cut—they just agreed that as a group, “they” would do some cutting—some months down the road—and that the “they” in that equation wouldn’t be Iran. And it wouldn’t be Nigeria. And it wouldn’t be Libya.

And still, amid all this ambiguity and mystery, and with some distant promise to shave a mere 240,000 barrels of oil per day off OPEC’s record production figures, oil climbed above $50 a barrel. Today, Brent is trading at $52.64, which is a 12-month high-a monumental swing on mere talk.

And sure, some minor fundamentals have changed, such as five weeks of crude oil inventory draws in the U.S., but those inventory numbers are still way too high. In reality, OPEC hasn’t actually done anything to ease the glut. They’ve just talked… about talking… two months from now. In fact, the only actions that OPEC has taken is to pump oil at record paces, adding to the glut, and hoping that speculators will lap up what they’re dishing out in rhetoric. That’s what OPEC is doing today.

So happy are the markets on this wispy nothingness, in fact, that some are suggesting the oil markets are poised for a major meltdown, as speculators buy up contracts that are equal to a year’s worth of U.S. consumption—amounts that can’t possibly be delivered and will be pushed off to next month’s contracts or cancelled. To put this in perspective, there are 480 million barrels of oil on order for delivery in November to Cushing, Oklahoma—a facility that is capable of handling only 50 million per month.

What will also be pushed aside are some other cold, hard facts, such as Libya’s production increases, or Iraq’s, or Iran’s, and how fundamentally, this means the remaining OPEC members would have to make deeper cuts to offset these increases and still meet the organization’s promised cut. Deeper cuts that could hurt whichever member is tasked with taking on this burden.

But to keep the market’s eye on the OPEC ball despite market saturation, the Algerian Energy Minister, desperate to save his country from an economic collapse, made yet another announcement on behalf of OPEC that the bloc would be willing to cut yet another 1% “if we need to” on top of the cuts proposed out of the meeting in Algiers, adding that there would be even more meetings forthcoming—the first of which will be in Istanbul on Oct 9-13, again, on the sidelines of another energy meeting, the World Energy Congress. But this time, the informal talks about the freeze will include non-OPEC Russia and non-OPEC Azerbaijan.

As Reuters reports, the meeting signals that OPEC “is more serious now about managing the global supply glut.” Russia apparently doesn’t share this perceived seriousness, with Russia’s Energy Minister Alexander Novak saying on Friday that he doesn’t expect to sign a deal with OPEC during this meeting. Just more talk.

And yet another meeting is scheduled in Vienna for October 28 and 29, according to OPEC sources, followed by a “long-term strategy” meeting on November 1-4, and a technical meeting again in Vienna on November 23 and 24, and possibly a follow-up meeting of the High Level Committee a day later on November 25. Finally, recommendations will be presented at the previously disclosed and much anticipated meeting on November 30.

That’s plenty of evenly spaced talk that is sure to keep OPEC in media headlines, and give the oil speculators something to play with until that time. After that, it’s anyone’s guess as to how long prices will hold, but it’s likely that regardless of the outcome of the 30 November recommendation meeting, OPEC will continue to feed the beast with talk—and the market will readily accept the handout, even if it’s in lieu of the fundamentals.

By Julianne Geiger for Oilprice.com

Link to original article: http://oilprice.com/Energy/Energy-General/For-How-Long-Can-OPEC-Talk-Up-Oil-Prices.html

12/31/15

$10 Trillion Investment Needed To Avoid Massive Oil Price Spike Says OPEC

OPEC says that $10 trillion worth of investment will need to flow into oil and gas through 2040 in order to meet the world’s energy needs.

The OPEC published its World Oil Outlook 2015 (WOO) in late December, which struck a much more pessimistic note on the state of oil markets than in the past. On the one hand, OPEC does not see oil prices returning to triple-digit territory within the next 25 years, a strikingly bearish conclusion. The group expects oil prices to rise by an average of about $5 per year over the course of this decade, only reaching $80 per barrel in 2020. From there, it sees oil prices rising slowly, hitting $95 per barrel in 2040.

Long-term projections are notoriously inaccurate, and oil prices are impossible to predict only a few years out, let alone a few decades from now. Priced modeling involves an array of variables, and slight alterations in certain assumptions – such as global GDP or the pace of population growth – can lead to dramatically different conclusions. So the estimates should be taken only as a reference case rather than a serious attempt at predicting crude prices in 25 years. Nevertheless, the conclusion suggests that OPEC believes there will be adequate supply for quite a long time, enough to prevent a return the price spikes seen in recent years.

Part of that has to do with what OPEC sees as a gradual shift towards efficiency and alternatives to oil. The report issued estimates for demand growth five years at a time, with demand decelerating gradually. For example, the world will consume an extra 6.1 million barrels of oil per day between now and 2020. But demand growth slows thereafter: 3.5 mb/d between 2020 and 2025, 3.3 mb/d for 2025 to 2030; 3 mb/d for 2030 to 2035; and finally, 2.5 mb/d for 2035 to 2040. The reasons for this are multiple: slowing economic growth, declining population rates, and crucially, efficiency and climate change efforts to slow consumption. In fact, since last year’s 2014 WOO, OPEC lowered its 2040 oil demand projection by 1.3 mb/d because it sees much more serious climate mitigation policies coming down the pike than it did last year.

Of course, some might argue that even that estimate – that the world will be consuming 110 mb/d in 2040 – could be overly optimistic. Coming from a collection of oil-exporting countries, that should be expected. Energy transitions are hard to predict ahead of time, but when they come, they tend to produce rapid changes. Any shot at achieving the world’s stated climate change targets will require a much more ambitious effort. While governments have dithered for years, efforts appear to be getting more serious. More to the point, the cost of electric vehicles will only decline in real dollar terms over time, and adoption should continue to rise in a non-linear fashion. That presents a significant threat to long-term oil sales.

At the same time, OPEC also issued a word of caution in its report. While oil markets experience oversupply in the short- to medium-term, massive investments in exploration and production are still needed to meet demand over the long-term. OPEC believes $10 trillion will be necessary over the next 25 years to ensure adequate oil supplies. “If the right signals are not forthcoming, there is the possibility that the market could find that there is not enough new capacity and infrastructure in place to meet future rising demand levels, and this would obviously have a knock-on impact for prices,” OPEC concluded. About $250 billion each year will have to come from non-OPEC countries.

In a similar but more disconcerting conclusion, the Oslo-based Rystad Energy recently concluded that the current state of oversupply could be “turned upside down over the next few years.” That is because the drastic spending cuts today will result in a shortage within a few years. To put things in perspective, Rystad says that the oil industry “needs to replace 34 billion barrels of crude every year – equal to current consumption.” But as a result of the collapse in prices, the industry has slashed spending across the board and “investment decisions for only 8 billion barrels were made in 2015. This amount is less than 25% of what the market requires long-term,” Rystad Energy concluded. The industry cut upstream investment by $250 billion in 2015, and another $70 billion could be cut in 2016. The latter figure did not take into account the recent decision by OPEC to abandon its production target, which sent oil prices falling further.

So what are we to make of this? There could be plenty of oil supplies in the future, but as it stands, the industry is massively underinvesting? This illustrates a troubling tension within the oil industry. Oil prices will be set by the marginal cost of production, and recent efficiency gains notwithstanding, marginal costs have generally increased over time. Low-cost production depletes, and the industry becomes more reliant on deep-water, shale, or Arctic oil, all of which require higher levels of spending. In many cases, these sorts of projects are not profitable at today’s prices. The price spikes seen in 2011-2014 sowed the seeds of the current bust, but the pullback today could create the conditions of another spike in the future. OPEC could be a bit too sanguine with its call for $95 oil in 2040.

At the same time, future price spikes set up the possibility of much greater demand destruction, especially if alternatives become more viable. This is the difficult balancing act that the industry must pull off over the next few decades.

Article Source: http://oilprice.com/Energy/Crude-Oil/10-Trillion-Investment-Needed-To-Avoid-Massive-Oil-Price-Spike-Says-OPEC.html

By Nick Cunningham of Oilprice.com

10/6/15

Is Russia Plotting To Bring Down OPEC?

President Putin’s recent moves in the Middle East—to shore up Bashar al-Assad’s regime in Syria through deployment of combat aircraft, equipment, and manpower and build-out of air-, naval-, and ground-force bases, and the agreement in the last week with Iran, Iraq, and Syria on intelligence and security cooperation—could contribute to Russian efforts to combat the myriad negative pressures on Russia’s vital energy industry.

Live by Energy…

Energy is the foundation of Russia, its economy, its government, and its political system. Putin has highlighted on various occasions the contribution Russia’s mineral wealth, in particular oil and natural gas, must make for Russia to be able to sustain economic growth, promote industrial development, catch up with the developed economies, and modernize Russia’s military and military industry.

Even a casual glance at the IMF’s World Economic Outlook statistics for Russia shows the tight correlation since 1992 between GDP growth on the one hand and oil and gas output, exports, and prices on the other (economic series available here). According to the IMF’s 2015 Article Iv Consultation-Press Release and Staff Report, published August 3, oil and natural gas exports comprised 65 percent of exports, 52 percent of the Federal government budget, and 14.5 percent of GDP in 2014. Including their domestic contribution, hydrocarbons represent ~30 percent of GDP.

While oil and natural gas are crucial to Russia, Russia’s crude and natural gas are crucial to its neighbors on the Eurasian landmass. Russia supplied about 30 percent (146.6 bcm) of Europe’s natural gas in 2014, and about 25 percent of its crude (3.5 mmbbl/day) in 2013. Russia’s oil and natural gas are also important to its Asian and Central Asian neighbors.

It is not only the commodities that make Russia crucial, but its massive land-based infrastructure for their distribution throughout the Eurasian landmass. As Tatiana Mitrova, head of the oil and gas department, Energy Research Institute, Russian Academy of Sciences, pointed out regarding natural gas in The Geopolitics of Russian Natural Gas:

“Russia has a unique transcontinental infrastructure in the heart of Eurasia (150,000 km of trunk pipelines), which also makes it a backbone of the evolving, huge Eurasian gas market (which could include Europe, North Africa, the Commonwealth of Independent States (CIS), Caspian Sea region, and Northeast Asia). Control over the transportation assets in this region together with vast gas reserves make Russia the key element of this new market.”

The land-based oil distribution network is smaller, but also important. The 4,000 km Druzhba pipeline delivers about 1 mmbbl/day of crude to Europe—about 30 percent of total shipments to Europe. In the Far East, Rosneft shipped 22.6 million tons of crude to China in 2014 through the East Siberian Pacific Ocean (ESPO) pipeline.

The Russian government continues to seek to extend and expand the natural gas distribution infrastructure—into Europe, with various proposed pipeline projects (Nord Stream 2, Turkish Stream 2, 3, and 4, South European Pipeline), and into China, with two large pipeline projects, Power of Siberia Pipeline (to supply China from East Siberia), and the proposed Altai pipeline (to supply China from West Siberia).

…Death by Energy

In the last few years, the threats to Russia’s energy industry have multiplied and intensified. They pose an existential threat to the industry and therefore to the Russian economy:

– The revenues Russia can earn from its crude and natural gas exports face intense pressure. The Saudi decision to let the market set prices and to pursue market share, has led to steep declines in crude and petroleum product prices. The decision also has impacted natural gas export prices negatively, since, for Russia’s long-term supply agreements, they wholly or partially are indexed to oil prices. The transition in Europe to hybrid natural gas pricing models (which take European spot hub prices into account) also has pressured natural gas pricing. (Natural gas data from Gazprom).

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Adding to the revenue pain, natural gas export volumes have been falling, according to Gazprom (which has a monopoly on pipeline exports), as have domestic volumes within Russia:

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It is therefore not surprising that the aforementioned IMF Article Iv Consultation-Press Release and Staff Report projected sharp declines in 2015 and 2016 from 2014 levels for oil export revenues ($109.8 billion and $96 billion respectively) and natural gas export revenues ($12 billion and $14.3 billion respectively).

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Since these IMF projections are based on $60.1 and $65.8 per barrel prices in 2015 and 2016, oil export revenues will undershoot these pessimistic IMF projections, as crude prices are projected to stay below $60 through 2016 (EIA estimates for Brent are $54.07 and 58.57 in 2015 and 2016 respectively).

– The U.S. and European Union’s decisions to impose—and maintain—sanctions on Russia after its invasion and annexation of Crimea and invasion and informal annexation eastern Ukraine will pile more pressure on the Russian energy industry. They include bans on financing for and the supply of critical equipment and technology to important Russian energy projects. Novatek and its partners Total and Chinese National Petroleum Company still lack $15 billion of the $27 billion needed to finance the Yamal LNG plant. Denis Khramov, Russia’s deputy Minister of Natural Resources, said September 28 at a conference in Russia’s Far East that Rosneft and Gazprom are delaying some offshore drilling by two to three years because of sanctions and low oil prices. The sanctions are also impeding Gazprom’s ability to develop the Chayandinskoye and Kovyktinskoye fields in eastern Siberia, from which it plans to supply natural gas to China under the bilateral $400 billion, thirty year deal signed in 2014.

– Following the Russian invasion of Crimea and eastern Ukraine, The European Union is now even more determined to reduce its dependence on Russia for natural gas and to force Gazprom submit to EU competition rules. Europe has sought and continues to seek alternatives Russian natural gas (among them, U.S. LNG and Iranian pipeline and/or LNG). The European Commission, the European Union’s executive body, has refused to bless Gazprom’s proposed 55 bcm/year Nord Stream 2 natural gas pipeline project, citing existing surplus Gazprom pipeline capacity into Europe and insufficient future demand for Russian natural gas. Also, the EU Commission in April charged Gazprom with violating the EU’s anti-trust laws for anti-competitive practices and unfair pricing in Central and Eastern Europe. If found guilty, Gazprom could face substantial fines of around $1 billion. Even if Gazprom avoids fines and manages to reach a settlement with the EU, as it hopes to do, its European market share and pricing will remain under pressure into the future.

– The emergence of the U.S., along with Canada, as powerful crude, NGL, and natural gas producers is also a major concern for the Russian economy. This has transformed the U.S. from a market for Russian crude and natural gas (via LNG) to a global competitor. If, as seems increasingly likely, the ban on crude exports is lifted, U.S. crude will compete with Russian crude in several key markets. It would also force foreign suppliers to seek other markets for all or part of the exports they previously sent to the U.S. This in turn would intensify competition among these crude exporting countries for share in those markets. In regard to natural gas, its explosive output growth in the U.S. undercut Gazprom’s rationale for its Baltic LNG project (10 mtpa), turned the U.S. into a major (potential) LNG competitor in global LNG import markets, and, via the U.S. toll- and Henry Hub- pricing model, weakened Gazprom’s ability to insist on oil-indexed, long-term contracts.

Saving Russian Energy (and Russia) through the Middle East?

Putin’s moves in the Middle East could help Russia address the impact of these threats to the Russian energy industry. They potentially enhance the attractiveness of Russian crude and natural gas supplies compared to those from Saudi Arabia and its Gulf Arab allies.

In the selection of crude and natural gas suppliers, security is a key consideration for importers. Wary of U.S. naval power, the Chinese, for example, prefer pipeline natural gas supplies over seaborne LNG supplies. Importers therefore must take into consideration the potential threats to transport. In this critical area, Russia enjoys a decided advantage over Saudi Arabia and the Gulf Arab producers, which depend on sea transport through the Persian Gulf and the Red Sea to ship their oil and LNG.

Each of the three routes from these two bodies of water passes through a “choke point” (from the Red Sea, through the Suez Canal to Europe and through the Mandeb Strait to Asia, from the Persian Gulf through the Strait of Hormuz). By adding an airbase to their military presence in Syria, the Russians—coordinating with Iran, Syrian President Assad, and eventually possibly Iraq—would have the capability to disrupt shipments from Persian Gulf and Red Sea terminals.

Russia’s export channels are less susceptible to disruption. With the exception of LNG exports to Asia from Sakhalin, Russia sends natural gas to its customers via pipeline. About 70 percent of Russia’s seaborne oil exports are susceptible to choke points (shipments from two ports on the Gulf of Finland through the Baltic Sea to the Atlantic and one port on the Black Sea through the Turkish Strait/Bosporus to the Mediterranean), while 30 percent are not (pipeline shipments to Europe and ESPO pipeline shipments to the port of Primorsk near Vladivostok).

Putin’s moves also are strengthening Russia’s influence with OPEC. Russia already has extensive and close ties with Iran and Venezuela, and is now laying the basis for such ties with Iraq. Putin has aligned Russia with OPEC’s have nots–the members lacking financial resources to withstand low crude prices for an extended period and that have objected to Saudi policies (Iran, Iraq, Angola, Nigeria, Libya, Algeria, Ecuador, and Venezuela)—against the haves (Saudi Arabia, Kuwait, the UAE, and Qatar). He has continually supported Venezuelan President Maduro’s calls for an emergency OPEC meeting on prices and his efforts to persuade Saudi Arabia to reverse its policy. Most recently, in the beginning of September, Putin told Maduro that the two countries “must team up to shore up oil prices”.

In addition, Russia’s deputy prime minister in charge of energy policy, Arkady Dvorkovich, in the beginning of September made comments that, in tone and substance, mocked Saudi policy, saying that “OPEC producers are suffering the ricochet effects of their attempt to flush out rivals by flooding the world with excess output,” expressing doubt that OPEC members “really want to live with low oil prices for a long time,” and implying that Saudi policy is irrational.

Indeed, Russia can be seen as maneuvering to split OPEC into two blocs, with Russia, although not a member, persuading the “Russian bloc” to isolate Saudi Arabia and the Gulf Arab OPEC members within OPEC. This might persuade the Saudis to seek a compromise with the have nots.

A strategic alliance with Iran and Iraq offers Putin two more potential avenues to pressure the Saudis. They can test Saudi determination to defend their market share at any price and its wherewithal financially to do so. Iran claims it can raise crude output by one million barrels within six or so months of the lifting of sanctions. The Saudis may be calculating that Iran must first rehabilitate its oil fields and that Iran, cash poor, cannot do so quickly. If this is the case, Russia could step in, offer Iran financing, and force the Saudis to contemplate prices staying lower longer than they anticipated and therefore continuing pressure on their economy.

Russia also could cooperate with Iran and Iraq to take market share from Saudi Arabia in the vital Chinese market. As a recent Bloomberg article pointed out, Saudi Arabia, Iran, Russia, Iraq and other countries are vying intensely for sales to China, the second largest import market and the major source of demand growth in coming years. Coordinating their pricing and consistently offering the Chinese prices below the Saudi price, they could seek to win market share. Such a price war would pressure the competitors’ currencies.

Since the Russians allow the Ruble to float, Iran maintains an informal and unofficial peg for its Rial to the US$, and Iraq has indicated it is willing to adjust its peg if necessary, while the Saudis are committed to the Riyal’s peg to the US$, Russia, Iran, and Iraq would have any advantage over Saudi Arabia. To the extent that Iran and Iraq allowed their currencies to adjust, Russian, Iranian, and Iraqi revenues in local currency terms would not decline as much as Saudi revenues fixed in US$ (and might even increase) as their currencies depreciated.

Results

Each of these opportunities offers the possibility to address the pressures on the Russian energy industry. However, Putin will have to play his cards carefully. Played heavy-handedly, he could intensify fears in Europe of excessive dependence on Russian energy supplies and awaken such fears in China. This could lead the Europeans and Chinese to search for other suppliers. In addition, mismanaged confrontation with the U.S. and Europe in and over Syria could lead to broadening and strengthening of economic and financial sanctions. Moreover, neither Iran nor Iraq will want to become overly dependent on Russia, which lacks the resources they need develop their energy industries.

Finally, the opportunities assume Putin’s gambits in Syria and with Syria, Iran, and Iraq in intelligence and security cooperation will succeed. And this, given the Soviet experience in Afghanistan and Putin’s experience in eastern Ukraine, is far from certain.

Article Source: http://oilprice.com/Energy/Energy-General/Is-Russia-Plotting-To-Bring-Down-OPEC.html

By Dalan McEndree for Oilprice.com

08/26/15

Saudis Could Face An Open Revolt At Next OPEC Meeting

OPEC next gathers December 4 in Vienna, just over a year since Saudi Oil Minister Ali Al-Naimi announced at the previous OPEC winter meeting the Saudi decision to let the oil market determine oil prices rather than to continue Saudi Arabia’s role of guarantor of $100+/bbl oil.

Despite the intense financial and economic pain this decision has inflicted on Saudi Arabia, its fellow OPEC members, and other oil producers, the Saudis have given no indication they plan to alter course. In fact, Saudis have downplayed the impact of lower prices on their country, asserting that the kingdom has the financial wherewithal to withstand lower oil prices.

Presumably swayed by Saudi equanimity, financial markets do not see the Saudis abandoning their current policy before, during, or after the upcoming OPEC meeting. CME Brent oil futures project continuity: as of August 18, 2015, CME Brent futures projected the price remaining below $60/bbl until June 2017. A CNBC poll of oil traders, analysts, and major fund investors, aired on CNBC August 17, showed 95 percent believing the Saudis will not alter course.

Are the futures market, CNBC’s oil traders, analysts, and major fund investors, and others, being lulled into an unjustified consensus?

The damage the Saudi decision has inflicted on Saudi Arabia itself provides reasons for the Saudis to change course.

Saudi Policy: OPEC-centric or Self-Serving?

Stresses within OPEC should add to the pressure on the Saudis to rethink their strategy. The Saudis sold their change to their fellow OPEC members as being in OPEC’s general interest. They asserted that the their traditional method of stabilizing the oil market, production cuts, would not work since non-OPEC producers would increase output; second, that “market” forces would reduce investment and therefore increase prices in the medium and longer term and ultimately benefit all OPEC members; and third, that any Saudi increase in output was aimed at defending its market share, not reducing theirs.

As the first anniversary of the Saudi decision approaches, it would be reasonable for OPEC outsiders–OPEC members, other than the Saudis and their Gulf Arab allies, Kuwait, UAE, and Qatar—to interpret Saudi policy shift as designed to serve Saudi interests and those of its Gulf Arab allies rather than their interests and those of OPEC in general.

“Market” forces include many components. A key component—perhaps the key component—is a country’s capability, at a minimum, to maintain output, and better yet, to increase output. Financial wherewithal is the foundation of this component. Saudi and Gulf Arab OPEC members’ foreign currency reserves and sovereign wealth funds (SWF) comprise approximately 78 percent of total OPEC member holdings, $2.73 trillion of $3.05 trillion.

As the following table shows, their advantage is particularly large on a per capita basis. Of the non-Saudi, non-Gulf Arab ally OPEC members, only Libyan per capita resources exceed the average. (The UAE includes data for three SWF funds only: Abu Dhabi Investment Authority ($773 billion), Abu Dhabi Investment Council ($110 billion), and Investment Corporation of Dubai ($183 billion)).

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Given the other budgetary demands on their oil revenues, $50/bbl or $60/bbl oil leaves these OPEC outsiders with little to invest in maintaining oil output, much less expanding output. Budgetary pressures and limited financial resources, for example, have forced the Iraqi government to request its foreign partners, BP in the Rumaila field and Exxon in the West Gurna-1 field, to reduce spending to cut 2015 investment by $500 million ($1.1 billion vs. $1.6 billion) and $1 billion ($2.5 billion to $3.5) respectively.

While all OPEC members, including Saudi Arabia, have suffered from the Saudi decision, they have not shared the pain equally. Saudi Arabia and its Gulf Arab allies, except Qatar, have increased output, while the output of other OPEC members, other than Iraq and Angola, has either flat-lined or decreased, compared to 2014:

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Given Saudi determination to defend its export markets, it is interesting that the percentage gain in their crude exports exceeded the percentage gain in crude output in 1H 2015, by 2.7 percentage points. For Iran, the only other OPEC country for which the IEA provides domestic demand data, the increase in exports, 0.7 percent, matched the increased domestic output.

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Interestingly, also, the Saudis increased their share of OPEC average daily output in the first half of 2015 over 2014 average daily volume—and their share of average daily global output. Their share of OPEC output increased to 26.6 percent in 1H 2015, from 26 percent on average in 2014, while their share of world output increased to 10.4 percent from 10.2 percent.

For the OPEC outsiders, this should be particularly distressing, since the increase in output likely deepened the decline in prices the Saudi decision to abandon its role as guarantor precipitated.

Both results continue trends seen since 2010. Saudi share of OPEC output increased three percentage points, from 23.6 percent in 2010 to 26.6 percent in 1H 2015. At the same time, the Saudi share of world output increased 1.1 percentage points, from 9.3 percent to 10.4 percent, during the same period; during the same period, OPEC output as a share of global output declined slightly, from 39.5 percent to 39.2 percent.

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In fact, over this period, Saudi Arabia and its Gulf Arab allies increased their total output 18.1 percent while the output from the other OPEC members decreased 5.4 percent. During this period, the Saudi and Gulf Arab share of global output was flat, declining only 0.1 percentage point, while the share of the other members declined 1.5 percentage points, from 16.7 percent to 15.2 percent.

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Impact on Non-OPEC Producers as Advertised?

In defense of their policy, the Saudis could point to IEA projections that show the rate of growth in output from major non-OPEC producers slowing substantially in 2016, particularly in North America, a major Saudi target, and Brazil:

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However, it is reasonable for the OPEC outsiders to question the actual efficacy of Saudi policy on non-OPEC producers and the benefit it will bring them. In both the United States and Russia, each of which produces roughly as much as Saudi Arabia, output increased in 2015 rather than decreasing, and will continue to increase in 2016 in the U.S.

The IEA projects Brazil’s output, despite Brazilian political turmoil, growing 6.45 percent in 2016. Moreover, Saudi policy, combined with the impact of U.S. and EU sanctions on Russia, led to the undesirable result for OPEC (and other oil exporters) that Russian exports have increased, from 7.21 million barrels/day in 2014 to 7.55 million barrels per day in 1H 2015, in part because as Russia’s economy contracted, reducing domestic crude demand to 3.47 MMbbls/day in 1H 2015 from 3.65 MMbbls/day, while crude output increased to 11.025 MMbbls/day from 10.86 MMbbls/day.

Moreover, any comfort the OPEC outsiders gain at best may be cold comfort. While the IEA projects surplus production will begin to recede in 2H 2016, they are suffering now (and in any case, it is a projection). As we have pointed out, RBC Capital’s fragile five, Algeria, Libya, Nigeria, Iraq and Venezuela, the pain is intense. Also, it is wealthy Saudi Arabia and its Gulf Arab allies and non-OPEC members, in particular the U.S., Canada, Mexico (foreign investment), and also Russia (Chinese investment), that will have the financial wherewithal to grow output to satisfy the 18 million barrel per day increase in demand that OPEC sees by 2040.

The December 2015 OPEC Meeting

Given the Saudi decision’s positive impact on their and their Gulf Arab allies’ relative position within OPEC and its negative impact on OPEC outsiders, it is possible, perhaps even likely, the Saudis will face an OPEC outsider revolt at the December 4 OPEC meeting.

The Saudis and their Gulf Arab allies would seem to have three possible approaches, should a revolt occur:

Reconciliation, as Saudi Arabia acquiesces in the wishes of OPEC’s weaker members to bring price increases forward through OPEC production cuts, Saudi Arabia bearing the brunt;

Separation, as the Saudis and their Gulf Arab allies ignore their fellow members’ entreaties and force them to wait for “market” forces to balance supply and demand; or

Divorce, as the Saudis and their Gulf Arab allies decide to exploit their financial wealth and go their own way, therefore forcing their fellow OPEC members, unable to finance their domestic oil industries, unwillingly to bear the brunt of global production cuts.

In October 2014, the Saudis began signaling their intention to abandon their role as guarantor. It is unlikely however, that whatever Saudi decision makers are now considering, they will show their hand in advance of the December meeting, since this would reduce pressure on the non-OPEC producers that the Saudis claim to be targeting, before necessary.

Source: http://oilprice.com/Energy/Crude-Oil/Saudis-Could-Face-An-Open-Revolt-At-Next-OPEC-Meeting.html

By Dalan McEndree for Oilprice.com

07/14/15

OPEC, Get Ready For The Second U.S. Oil Boom

What OPEC countries fear most is a follow-up technological revolution that will lead to a second oil boom in the U.S., and that fear is now being realized.

A technological revolution spurred the U.S. oil boom that resulted in the greatest increase in domestic oil production in a century, and while that has stuttered in the face of a major oil price slump and an OPEC campaign to maintain a grip on market share, the American response could be another technological revolution that demonstrates that the first one was merely an impressive embryonic experiment.

It’s not only about shale now—it’s about reviving mature oil fields through advancements in enhanced oil recovery, potentially opening up not only new shale fields, but older fields that have been forgotten.

There are myriad gloom-and-doom stories about what is often alluded to as a short-lived oil boom in the U.S. But what many fail to understand is that revolutions of this nature are phased, with the advent of new technology typically followed by a temporary halt in progress while we study the results and come up with something even better.

What we’re looking at here are advancements in EOR for greater production and cost efficiency that can weather oil price slumps and awaken America’s sleeping giant oil fields. Soon we are likely to see some new players in the field buying up oil assets and putting more advanced EOR technologies to work to re-ignite the revolution.

The shale revolution was stunning, indeed. But there have been setbacks—even beyond the oil price slump that has rendered fracking expensive. Fracking uses a lot of water. According to a recent U.S. Geological Survey study, the process uses up to 9.6 million gallons of water per well and is putting farming and drinking sources at risk in arid states, and especially in major drought-ridden shale-boom venues like Texas.

Phase two of the U.S. oil boom hits at the heart of the inadequacies of the first phase, in a natural progression.

There are two very interesting EOR advancements that have caught our attention in recent months: CO2 EOR and Plasma Pulse Technology (PPT).

CO2, or carbon dioxide EOR, involves injecting CO2 into ageing oil fields to sweep residual oil to the surface. In some cases, it can extend the production life of a field by more than 25 years. The U.S. is fortunate in this regard because it has a large volume of low-cost, naturally occurring CO2 at its disposal; however, in order to be widely employed the infrastructure to deliver it to oil fields has to be in place.

Visiongain estimates that global CO2 EOR spending will be $4.74 billion this year. “This will decline in the short term as low oil prices take their toll on the capital spending programmes of CO2 EOR operators, but is expected to rise rapidly in the next decade.”

Then we have something a bit more futuristic, even though it is already commercially viable—Plasma Pulse Technology, or PPT. This is a patent pending technology that enables the “re-opening” of wells without water, without polluting chemicals and without causing earthquakes. The “re-opening” side of this equation means that it doesn’t open rock like fracking, rather it comes in afterwards and cleans up well bores to clear the pathway for oil to flow faster and more efficiently to the surface like it once did.

Plasma Pulse Technology (PPT) creates a controlled plasma arc within a vertical well, generating a tremendous amount of heat for a fraction of a second, while the subsequent high-speed hydraulic impulse wave emitted is strong enough to remove any clogged sedimentation from the perforation zone without damaging the steel casing. The series of impulse waves also penetrates deep into the reservoir, which re-opens reservoir permeability for up to a year per treatment.

But to determine what new EOR technology is going to steal the limelight in the coming months and years, we follow the progress of the EOR leaders and the big strategic investors, such as Russian billionaire Roman Abramovich.

The market leader in extracting oil and gas using CO2 enhanced oil recovery processes is Denbury Resources (NYSE:DNR), which many will agree is a company that offers investors long-term value because of its focus on efficiency.

As for Abramovich, he is a metals magnate who also happens to own the Chelsea football club and is the 143rd wealthiest person in the world, worth about $9 billion according to Forbes. He is the main owner of UK-registered Millhouse LLC, a private investment company whose assets have included major stakes in Sibneft, which is now Gazprom Neft. In 2005, Millhouse sold a 72 percent stake in Sibneft to Gazprom for more than $13 billion.

In fact, PPT first caught our eye back in February, when Abramovich—who has a track record of very strategic investments–moved to invest $15 million in a Houston-based company called Propell Technologies Group, Inc. (OTC:PROP). Until Abramovich brought it to the world’s attention, few had probably ever heard of Propell, which has a wholly-owned subsidiary called Novas Energy U.S.A, the licensee and developer of the PPT technology.

The subsidiary licenses the technology from a venture capital-backed Russian energy technology company named Novas Energy, and the Russian connection makes sense here. After all, Plasma Pulse technology has been very successfully employed in both Russian producer and injector wells. More than anything, this Russian connection speaks volumes about the efficiency of this advanced EOR technology: Russia doesn’t have draconian fracking regulations pressuring companies to use environmentally friendly technology. What this means is that it’s cost effective; otherwise Russians wouldn’t be using it.

Beyond the technology itself, if we follow Abramovich further we get a glimpse of what’s about to happen on the U.S. EOR scene. In February, Abramovich took a stake with Propell, which was made through a Cyprus-registered company called Ervington Investments Limited. The February deal saw Propell raise $5 million from the sale of 1,525,424 shares of a preferred stock at $3.28 per share. The deal also gave Ervington the option to invest an additional $9.75 million, under the same terms, which it took advantage of on July 6. This Abramovich investment will be used to acquire oilfields with the overall aim to employ the new technology to increase output.

You have to read between the lines here. Abramovich doesn’t do anything small. He’ll get the infrastructure in place and then look to acquire a significant position in the U.S. oil sector at today’s fire sale prices to employ this EOR technology.

If OPEC keeps oil prices below $100 for some time to come, the smart investor will be looking for something that captures long-term value, which means focusing on operational efficiency.

So while many might assume that EOR is now too expensive to be supported during an oil price slump, a little counter-intuition tells us that this will change in the immediate future and investors will start looking at companies who are actually behind this new technology or the companies who are focusing on using this new technology–whether it be CO2 EOR or PPT–to get more out of their oilfields.

Over the long-term EOR makes production cheaper. And as Chesapeake Energy’s (NYSE:CHK) Jason Pigott succinctly put it: “We can’t control prices, so we have to focus on how much it costs to get it out of the ground.”

When low oil prices close doors, technology steps in to reopen them, and certainly innovation will drive the next U.S. oil boom—and the latest advancements are already commercially viable. The door has been re-opened.

What OPEC knows is this: The U.S. has over 21 billion barrels of oil that could be economically recovered with today’s EOR technologies. And according to figures from the U.S. Department of Energy and the Western Governors Association (WGA), further advances in this technology could cause that figure to double.

Source: http://oilprice.com/Energy/Crude-Oil/OPEC-Get-Ready-For-The-Second-US-Oil-Boom.html

07/7/15

Is Saudi Arabia Leaving The U.S. Behind For Russia?

The news from the recent St. Petersburg Economic Forum, which took place from June 18 to 20, inspired a torrent of speculation on the future direction of energy prices.

But the real buzz at the conference was the unexpected but much publicized visit of the Saudi Deputy Crown Prince, as an emissary of the King. The Prince, who is also his country’s Defense Minister, carried the royal message of a direct invitation to President Putin to visit the King, which was immediately accepted and reciprocated, with the Prince accepting on behalf of his father.

It would be news enough that the unusually high level delegation from a long-time ally and protectorate of the U.S., like Saudi Arabia, was visiting a Russian sponsored economic conference, in a country sanctioned by the U.S.

Some saw this well publicized meeting as the first sign of an emerging partnership between the two greatest global oil producers. If the warmth of the meeting was any evidence, it seems likely that Russia, a non-OPEC producer, might come a lot closer to the fold.

That could mean that, at the very least, Russia would have a voice in the cartel’s policy decisions on production. And if so, it would be a voice on the side of stable but rising prices.

The great Indian journalist, M.K. Bhadrakumar (MKB), may have been the first to point out that there was plenty of reasons for the Saudis and Russians to come closer together. Among these are the U.S.’ diminishing dependence on Middle Eastern energy, due to the momentous development of shale resources. There’s also the over-riding goal of the U.S. to pivot toward the East, where a huge economic transformation is unfolding, while reducing the U.S. role in the Middle East. It’s clear that the Saudis are going to have to make new friends.

MKB also makes the point that although the Saudis are wildly opposed to any form of U.S. entente with Iran, the clear-eyed Kremlin understands that there are many temptations for its erstwhile ally, Iran, to move much closer to the West.

Pepe Escobar of Asia Times saw the Prince’s visit as harboring the first glimmer of light in ending the current global oil trade war, in which the Saudi’s might turn down the spigot and lower production, enabling prices to rise: “Facts on the ground included Russia and Saudi Arabia’s oil ministers discussing a broad cooperation agreement; the signing of six nuclear technology agreements; and the Supreme Imponderable; Putin and the deputy crown prince discussing oil prices. Could this be the end of the Saudi-led oil price war?”

Bullish oil traders thought they found some hope in the words of Ali al-Naimi, the famous and longtime President and CEO of the Saudi National Oil Company, Aramco, and current oil minister. Naimi publicly stated: “I am optimistic about the future of the market in the coming months in terms of the continuing improvement and increasing global demand for oil as well as the low level of commercial inventories.” This, the minister said, should lead to higher oil prices by year’s end.

Ali al-Naimi publicly praised the enhanced bilateral cooperation between Riyadh and Moscow, stating that, “[t]his, in turn, will lead to creating a petroleum alliance between the two countries for the benefit of the international oil market…”

This could be music to the ears of oil price bulls. But more skeptical minds were quick to clamp down excessive optimism. “Of course, we shouldn’t read into any new developments outside political frameworks, because I can hardly imagine that Saudi Arabia has decided to turn against its alliances—but it probably wants to get out of the narrow US corner and expand its options,” Abdulrahman Al-Rashed, the General Manager of Al Arabiya News Channel, wrote in a column after the summit.

At the meeting, the Saudis and Russians signed several memoranda of understanding including the development of nuclear power plants in the Kingdom, with the Saudis planning some 16+ plants.

The two sides also plan on setting up working groups to study other possible energy joint ventures in Russia. Russia also agreed to the construction of railways and metro subways for the Saudis. Russia is also believed to have agreed to supply advanced military defense equipment to the Kingdom, despite the Saudis being long time arms customers of both the UK and U.S.

However there is quite a bit of doubt that the U.S. is ready to just step aside and be replaced by Russia as the Saudis’ main ally. Saudi Arabia and Russia are on opposite sides on a range of geopolitical issues, including Iran, Syria, and Yemen. These conflicts will likely put a limit on any potential entente.

Also, there is serious doubt as to whether it is so simple for the Saudis to raise oil prices. Flooding the markets with oil to crash prices only requires the Saudis to over-produce by some one and a half million barrels of oil per day, easily within their grasp, and something the Saudis can do on their own.

Bringing prices up is a different story, requiring global oil producers to comply in oil cutbacks.

At the same time, rising prices are a clear signal to global producers to increase production, worsening the current glut, so that any price increase may prove to be temporary.

And yet, the fact is prices have been rising since the first of the year, and many are convinced there is more to go. C. DeHaemmer, a well-known energy newsletter writer, is now predicting a price rise by WTI to a range of $73-$78, and a Brent range of $82-85, by years end. Not impossible, but long term, the issue becomes cloudier.

On a different matter, there was another surprise announcement at the forum, with India, a longtime U.S. ally, confirming that it will sign a free trade agreement with the Eurasian Economic Union (EEU), a Russian-led trade bloc including Belarus and Kazakhstan.

Russia and China have agreed on making the EEU a central part of the Chinese sponsored Silk Road, so by default, it would appear that India is moving towards joining the grand Chinese project.

As has become standard at the St. Petersburg Forum, a number of energy deals were signed, including a BP deal to buy a major stake in a Siberian oil field owned by Rosneft, a company suffering under international sanctions. BP, as a twenty percent stakeholder in Rosneft, says it is seeking to expand on its joint ventures with the Russian company

Another deal was signed with Gazprom to build a second pipeline under the Baltic, following the path of Nordstream to Germany, in partnership with Royal Dutch Shell, Germany’s E.ON, and Austria’s OMV. Apparently, Western Europe’s oil giants find Russian sanctions to be no hindrance in dealing with Russian energy companies.

After his onstage TV interview with Putin, Charlie Rose, the well-known TV celebrity, was asked why he had decided to become a moderator at the Forum. He said, “I believe it’s important to talk to people.”

In the meantime, the U.S. reporter, with camera man in tow, found nothing of interest to report at the conference.

Source: http://oilprice.com/Energy/Crude-Oil/Is-Saudi-Arabia-Leaving-The-US-Behind-For-Russia.html

By Robert Berke for Oilprice.com

06/4/15

The Evolution Of The Oil Weapon

In the age of derivatives, swaps, and electronic money transfers, a new form of warfare has emerged: financial warfare.

Recently, the US has passed sanctions on countries such as Syria, Venezuela, and North Korea , but the majority of energy related sanctions passed have been targeted at Iran and Russia.

An estimated 68 percent of Russia’s government revenue is derived from oil and gas exports, while 80 percent of Iran’s revenue comes from oil exports. That presents a very large target for the use of financial weapons.

To understand why financial warfare is now so commonplace, one must understand how it came into existence and what has been achieved taking such an approach.

The oil weapon first came into existence in 1965, when Egypt nationalized the Suez Canal. What resulted from this was a declaration of war by France, England, and Israel. As a way to counter this invasion, Saudi Arabia decided to ban exports to England and France. This embargo turned out to have minimal economic impact, as the US increased shipments to Europe, and international oil companies redirected shipments to England and France.

The next embargo imposed was in 1967, when Arab states imposed an embargo on the US, Britain, and West Germany. This embargo was enacted after a rumor surfaced that Britain and the US were providing air cover for Israeli planes, after Israel bombed Egyptian military airports in the 1967 war. This embargo failed, due to the fact that Arab oil revenues declined. This embargo also wasn’t enforced properly, as Western countries were still receiving oil from Arab countries.

But the most famous incident came in 1973. This was when OPEC issued a new embargo on countries that provided military aid to Israel, in the Yom Kippur war. This proved to have a greater economic impact on Europe and the US, because Saudi Arabia displaced Texas as the world’s swing producer.

The 1973 embargo led to an increase in domestic fuel prices, shortages of gasoline, and the rationing of gasoline fuel. This embargo changed the dynamics of US foreign policy.

After the 1973 embargo, Richard Nixon sent his secretary of state Henry Kissinger to Saudi Arabia with a proposed deal, to ensure that an embargo such as this would never happen to the United States again.

After some revisions, in 1976, the House of Saud and Henry Kissinger finally reached an agreement. The agreement did the following things, according to Marin Katusa’s 2014 book, “The Colder War.” The Saudi’s agreed to:

1. Give the US as much oil as it desired, for general consumption and national security measures. Thus increasing or decreasing oil production to the benefit of the US

2. To only sell oil for US dollars, and to reinvest profits in US treasury securities.

In return, the US guaranteed:

1. The protection of the Saudi Kingdom from rival Arab countries

2. The protection of Saudi oil fields

3. Protection from an Israel invasion.

The Saudi’s agreed to this because, even though they had vast amounts of oil, they didn’t possess an army which could protect them from its surrounding enemies; which included Iran, Iraq, and Israel.

This deal not only secured a steady supply of oil to the US, but allowed the US to expand its global footprint.

How the US and the Saudi’s colluded to topple the USSR

In 1982, a secret declaration for economic war with The Soviet Union was signed. This declaration included:

• No new contracts to buy Soviet natural gas
• Accelerate development of an alternate supply to Soviet gas for parts of Europe
• A plan to substantially raise interest rates on credit to the USSR
• The requirement of higher down payments and shorter maturities on Russian bonds.

This declaration made the USSR’s debt load much more burdensome, but what delivered the final blow to the USSR was the doubling of oil production from Saudi Arabia in 1986. This pushed oil prices down to roughly 10 dollars per barrel, thus vastly decreasing the USSR’s government revenue. This declaration combined with low oil prices, according to James Norman, author of the 2008 book, “The Oil Card,” is what led to the collapse of the USSR.

Today, the international financial system is much more sophisticated. Still, using financial sanctions with the intention of creating a de facto embargo on oil is a widespread practice today – just look at the cases of Iran and Russia.

Source: http://oilprice.com/Energy/Crude-Oil/The-Evolution-Of-The-Oil-Weapon.html

By John Manfreda of Oilprice.com

12/29/14

Did The Saudis And The US Collude In Dropping Oil Prices?

The oil price drop that has dominated the headlines in recent weeks has been framed almost exclusively in terms of oil market economics, with most media outlets blaming Saudi Arabia, through its OPEC Trojan horse, for driving down the price, thus causing serious damage to the world’s major oil exporters – most notably Russia.

While the market explanation is partially true, it is simplistic, and fails to address key geopolitical pressure points in the Middle East.

Oilprice.com looked beyond the headlines for the reason behind the oil price drop, and found that the explanation, while difficult to prove, may revolve around control of oil and gas in the Middle East and the weakening of Russia, Iran and Syria by flooding the market with cheap oil.

The oil weapon

We don’t have to look too far back in history to see Saudi Arabia, the world’s largest oil exporter and producer, using the oil price to achieve its foreign policy objectives. In 1973, Egyptian President Anwar Sadat convinced Saudi King Faisal to cut production and raise prices, then to go as far as embargoing oil exports, all with the goal of punishing the United States for supporting Israel against the Arab states. It worked. The “oil price shock” quadrupled prices.

It happened again in 1986, when Saudi Arabia-led OPEC allowed prices to drop precipitously, and then in 1990, when the Saudis sent prices plummeting as a way of taking out Russia, which was seen as a threat to their oil supremacy. In 1998, they succeeded. When the oil price was halved from $25 to $12, Russia defaulted on its debt.

The Saudis and other OPEC members have, of course, used the oil price for the obverse effect, that is, suppressing production to keep prices artificially high and member states swimming in “petrodollars”. In 2008, oil peaked at $147 a barrel.

Turning to the current price drop, the Saudis and OPEC have a vested interest in taking out higher-cost competitors, such as US shale oil producers, who will certainly be hurt by the lower price. Even before the price drop, the Saudis were selling their oil to China at a discount. OPEC’s refusal on Nov. 27 to cut production seemed like the baldest evidence yet that the oil price drop was really an oil price war between Saudi Arabia and the US.

However, analysis shows the reasoning is complex, and may go beyond simply taking down the price to gain back lost marketshare.

“What is the reason for the United States and some U.S. allies wanting to drive down the price of oil?” Venezuelan President Nicolas Maduro asked rhetorically in October. “To harm Russia.”

Many believe the oil price plunge is the result of deliberate and well-planned collusion on the part of the United States and Saudi Arabia to punish Russia and Iran for supporting the murderous Assad regime in Syria.

Punishing Assad and friends

Proponents of this theory point to a Sept. 11 meeting between US Secretary of State John Kerry and Saudi King Abdullah at his palace on the Red Sea. According to an article in the Wall Street Journal, it was during that meeting that a deal was hammered out between Kerry and Abdullah. In it, the Saudis would support Syrian airstrikes against Islamic State (ISIS), in exchange for Washington backing the Saudis in toppling Assad.

If in fact a deal was struck, it would make sense, considering the long-simmering rivalry between Saudi Arabia and its chief rival in the region: Iran. By opposing Syria, Abdullah grabs the opportunity to strike a blow against Iran, which he sees as a powerful regional rival due to its nuclear ambitions, its support for militant groups Hamas and Hezbollah, and its alliance with Syria, which it provides with weapons and funding. The two nations are also divided by religion, with the majority of Saudis following the Sunni version of Islam, and most Iranians considering themselves Shi’ites.

“The conflict is now a full-blown proxy war between Iran and Saudi Arabia, which is playing out across the region,” Reuters reported on Dec. 15. “Both sides increasingly see their rivalry as a winner-take-all conflict: if the Shi’ite Hezbollah gains an upper hand in Lebanon, then the Sunnis of Lebanon—and by extension, their Saudi patrons—lose a round to Iran. If a Shi’ite-led government solidifies its control of Iraq, then Iran will have won another round.”

The Saudis know the Iranians are vulnerable on the oil price. Experts say the country needs $140 a barrel oil to balance its budget; at sub-$60 prices, the Saudis succeed in pressuring Iran’s supreme leader, Ayatollah Ali Khamanei, possibly containing its nuclear ambitions and making the country more pliable to the West, which has the power to reduce or lift sanctions if Iran cooperates.

Adding credence to this theory, Iranian President Hassan Rouhani told a Cabinet meeting earlier this month that the fall in oil prices was “politically motivated” and a “conspiracy against the interests of the region, the Muslim people and the Muslim world.”

Pipeline conspiracy

Some commentators have offered a more conspiratorial theory for the Saudis wanting to get rid of Assad. They point to a 2011 agreement between Syria, Iran and Iraq that would see a pipeline running from the Iranian Port Assalouyeh to Damascus via Iraq. The $10-billion project would take three years to complete and would be fed gas from the South Pars gas field, which Iran shares with Qatar. Iranian officials have said they plan to extend the pipeline to the Mediterranean to supply gas to Europe – in competition with Qatar, the world’s largest LNG exporter.

“The Iran-Iraq-Syria pipeline – if it’s ever built – would solidify a predominantly Shi’ite axis through an economic, steel umbilical cord,” wrote Asia Times correspondent Pepe Escobar.

Global Research, a Canada-based think tank, goes further to suggest that Assad’s refusal in 2009 to allow Qatar to construct a gas pipeline from its North Field through Syria and on to Turkey and the EU, combined with the 2011 pipeline deal, “ignited the full-scale Saudi and Qatari assault on Assad’s power.”

“Today the US-backed wars in Ukraine and in Syria are but two fronts in the same strategic war to cripple Russia and China and to rupture any Eurasian counter-pole to a US-controlled New World Order. In each, control of energy pipelines, this time primarily of natural gas pipelines—from Russia to the EU via Ukraine and from Iran and Syria to the EU via Syria—is the strategic goal,” Global Research wrote in an Oct. 26 post.

Poking the Russian bear

How does Russia play into the oil price drop? As a key ally of Syria, supplying Assad with billions in weaponry, President Vladimir Putin has, along with Iran, found himself targeted by the House of Saud. Putin’s territorial ambitions in the Ukraine have also put him at odds with US President Barack Obama and leaders of the EU, which in May of this year imposed a set of sanctions on Russia.

As has been noted, Saudi Arabia’s manipulation of the oil price has twice targeted Russia. This time, the effects of a low price have hit Moscow especially hard due to sanctions already in place combined with the low ruble. Last week, in an effort to defend its currency, the Bank of Russia raised interest rates to 17 percent. The measure failed, with the ruble dropping another 20 percent, leading to speculation the country could impose capital controls. Meanwhile, Putin took the opportunity in his annual televised address to announce that while the economy is likely to suffer for the next two years and that Russians should brace for a recession, “Our economy will get diversified and oil prices will go back up.”

He may be right, but what will the effect be on Russia of a sustained period of low oil prices? Eric Reguly, writing in The Globe and Mail last Saturday, points out that with foreign exchange reserves at around $400 billion, the Russian state is “in no danger of collapse” even in the event of a deep recession. Reguly predicts the greater threat is to the Russian private sector, which has a debt overhang of some $700 billion.

“This month alone, $30-billion of that amount must be repaid, with another $100-billion coming due next year. The problem is made worse by the economic sanctions, which have made it all but impossible for Russian companies to finance themselves in Western markets,” he writes.

Will it work?

Whether one is a conspiracy theorist or a market theorist, in explaining the oil price drop, it really matters little, for the effect is surely more important than the cause. Putin has already shown himself to be a master player in the chess game of energy politics, so the suggestion that sub-$60 oil will crush the Russian leader has to be met with a healthy degree of skepticism.

Moscow’s decision on Dec. 1 to drop the $45-billion South Stream natural gas pipeline project in favor of a new pipeline deal with Turkey shows Putin’s willingness to circumvent European partners to continue deliveries of natural gas to European countries that depend heavily on Russia for its energy requirements. The deal also puts Turkey squarely in the Russian energy camp at a time when Russia has been alienated by the West.

Of course, the Russian dalliance with China is a key part of Putin’s great Eastern pivot that will keep stoking demand for Russian gas even as the Saudis and OPEC, perhaps with US collusion, keep pumping to hold down the price. The November agreement, that would see Gazprom supply Chinese state oil company CNPC with 30 billion cubic meters of gas per year, builds on an earlier deal to sell China 38 bcm annually in an agreement valued at $400 billion.

As Oilprice.com commented on Sunday, “ongoing projects are soldiering on and Russian oil output is projected to remain unchanged into 2015.”

“Russia will go down with the ship before ceding market share – especially in Asia, where Putin reaffirmed the pivot is real. Saudi Arabia and North America will have to keep pumping as Putin plans to uphold his end in this game of brinksmanship.”

Source: http://oilprice.com/Energy/Oil-Prices/Did-The-Saudis-And-The-US-Collude-In-Dropping-Oil-Prices.html

By Andrew Topf of Oilprice.com