Google+

Are The Saudi’s Opening The Taps

OPEC has been on auto-pilot for the last year. Anyone who had any spare oil, put it on the market, Asian consumers would soak it up. Prices firmed nicely above $100/b, more than enough to keep petro-states in the black. If anything, OPEC’s problem was finding sufficient oil to cover supply side gaps within the cartel from Iranian sanctions, not to mention supply side slippages across a string of non-OPEC states from ‘Syria to Sudan’. The long term cartel king, Saudi Arabia stepped into the breach, consistently pumping above 9.5mb/d since June 2011 – the longest sustained period of such production levels for 11 years. It pushed production well above 10mb/d into 2012, with OPEC output increasing from 30.8mb/d in January to 31.75mb/d in May. It was a close run thing, but prices never breached $130/b, a figure many analysts thought would bring the entire house of global economic cards caving in. Crisis averted.

But having made easy money ‘moderating prices’ at the top, OPEC now faces a far more daunting challenge: How will the cartel protect a $100/b price flaw amid broken demand side fundamentals at the bottom? Brent prices have corrected 15% to $97/b over the past month, and downside risks are stillgathering alarming pace. Germany refuses to stop the Eurozone rot; the US appears intent on creating another Congressional debt crisis, and China doesn’t want to create further bubbles from its drastic 2009 stimulus. Whether that means a commodities ‘super-cycle’ from emerging market growth is over remains to be seen, but at the very least, OPEC’s internal troubles are about to start to stem further downside corrections. Traditional battle lines between GCC (Gulf doves) and petro-power hawks (Iran, Venezuela, Nigeria, Algeria) have already been drawn ahead of OPEC meetings (13-14th June, Vienna).

 

 

Pricing wars are hardly new, but they’re going to be particularly brutal given OPEC also has to appoint a new Secretary-General. Riyadh has proposed Majid Munif (a former Saudi representative to OPEC), while Iran has put forward a former oil minister, Gholam-Hosain Nozari. Given neither side has held the role for 45 years, and neither will willingly acquiesce to each other’s candidates, a compromise choice may be found from Ecuador (Wilson Paster), or Iraq (Thamer Al-Ghadban). Some think Saudi-Iranian relations are so bad that total gridlock could ensue, akin to 2004-2007 when the cartel failed to find a replacement for Álvaro Silva.

That’s unlikely to happen, precisely because Riyadh can bring further pricing pressures to bear if it wants to get its way in the cartel. The Kingdom’s policy space has admittedly tightened over the past couple of years, but they remain the only producer capable of significantly increasing or reducing production at will. Initial tanker data from Europe suggests Riyadh may have started reigning in production that was running around 6% over OPEC quota. It’s also raised July benchmarks for Arab Light grades in Asia. But Iran, Venezuela, Nigeria, Angola and Algeria will want restraint to come far faster and far deeper to firm prices.

The line being spun from the ‘free lunch’ brigade is that storage should easily cover any Iranian spikes when EU sanctions come into full effect 1st July, while OPEC quotas should be pared down to 29.5mb/d (or less). Cheap words from petro-hawks, not least because they’ll all continue to cheat on quotas to squeeze out every last drop they have. Riyadh knows that of course; hawks want a price floor to be set at $100/b to sustain political regimes, but to do so entirely at Saudi expense. Russia is no different outside the cartel: free riding 101.

Saudi Arabia (and its GCC partners) might be willing to play ball given ongoing concerns from the Arab Awakening, but with some budgetary tweaks and counter-cyclical cash to burn, they could all easily survive at $85/b making Iran et al sweat. Tehran might decide to rip up formal quotas as it did in June 2011, but that would be a costly mistake. If the Saudis let prices fall, political outages across smaller producer states could help to set a floor for them anyway. Iran would have no say in the matter. Given such ‘pricing perils’, Saudi Arabia holds all the aces to settle institutional issues, not to mention giving the global economy more breathing space (andWashington greater leeway over Iranian sanctions).

But the real reason to let prices fall a little further isn’t just to make very clear to OPEC states where the ultimate volume and pricing power rests, but to fight Riyadh’s bigger battle over the next decade: Retaining 40% of OPEC market share in the midst of supposedly huge non-OPEC supply growth. It didn’t go unnoticed that despite Saudi production averaging 31 year highs and prices hitting $128/b in March 2012, the forward curve for 2018 was trading at $30/b discounts relative to spot. You’d think with the cartel maxed out and proximate demand side problems looking bleak, five year curves would be exactly the other way, in sharp contango (i.e. far above prompt prices) once the global economy and demand side fundamentals were fixed.

The fact they weren’t is principally because the market thinks vast swathes of unconventional production will come online, not just in North America where production is back above 6mb/d, but in Canada, Brazil and even Arctic extremes. At $100/b that was a fair bet to place, but once benchmark prices drop back to two figures, the 6.4 trillion barrels of unconventional reserves sitting in the Americas look a far less certain prospect. Canadian tar distinctly sticky; Brazilian pre-salt horribly deep; Russian Arctic plays simply impossible.

So when OPEC meets in Vienna expect Saudi Arabia to call the shots. The new Secretary General will either be a Saudi national, or a compromise candidate Riyadh can live with. Quotas will stay close to 30mb/d with minor reductions possible. Thinly veiled threats of sustained (or increased) production will be made if Iran doesn’t play ball. Yet the long term price point to watch isn’t just one that keeps OPEC in business and Riyadh in control, but where the al-Saud can maintain secular market share. Letting prices informally slide to $85-90/b might be the kind of warning shot Riyadh wants to send to scrub unconventional plays off global balance sheets. Its OPEC colleagues will see that as sailing far too close to the political wind, but a Saudi bloodbath now, might be just the medicine OPEC requires to sustain its long term health, not unless the cartel is absolutely determined to keep pricing itself out of existence.

Source:  Forbes.com

Entertainment

Raunchy Adaptation of Classic TV Series Arrives on Home Video

  Chips DVD Review by Kam Williams Raunchy Adaptation of Classic TV Series Arrives on Home Video Whenever a classic television series is made into a movie, the buzz always seems to be about whether the screen version will be a creative variation on the theme or merely a campy, cornball, take-the-money-and-run ripoff trading in familiar formulas and shopworn cliches. After all, for every inspired adaptation like Batman (1989), Charlie's … [Read More its Good for You.....]

Books

Gil’s Goodwill!

  Gil Robertson The “Book of Black Heroes” Interview with Kam Williams Gil's Goodwill! For nearly three decades, writer/author Gil L. Robertson, IV has used the written word to enlighten, empower and uplift. The one-time political organizer initially made his mark in entertainment journalism, penning over 50 national magazine covers and contributing bylines to a wide range of publications that include the Los Angeles Times, the Atlanta … [Read More its Good for You...]

Art

The Day After the Day Of

  The Day After the Day Of by Paul Ilechko   The sky sheds its tears. This morning is the morning of the day after. The day of mourning, the day after the day of.  I beseech the sky to shed tears in order to wash away the tears on my face.   This is the first day of the time after. This is the beginning of a new time, the days of pain, the days of sorrow. We are in mourning. The sky looks down and sheds its tears for … [Read More its Good For You...]

Real Estate

How to Hire a Winner in Real Estate

  How to Hire a Winner in Real Estate by Amy Lignor   You want to buy that new house because the twins are on their way. Little Betty and Little John are already there, but who knew you would have even more so soon? What’s that? Oh…well, of course, in order to buy that new home with four bedrooms instead of two, you will also need to sell your present homestead in order to get the money needed to start paying on a new one. And, of … [Read More its Good for You.....]

Lifestyle

Ejogo’s Largo!

    Carmen Ejogo The “It Comes at Night” Interview with Kam Williams Ejogo's Largo! Carmen Ejogo has established a distinguished career in both feature films and television. She is best known thus far for her leading role of civil rights activist ‘Coretta Scott King’ opposite David Oyelowo in Ava DuVernay's universally acclaimed SELMA as well as being singled out for her ‘mind-blowing’ lead role as Sister in SPARKLE alongside … [Read More its Good for You...]

Outdoors

Tidewater 230 LXF Combines Luxury, Family Friendly Features

  Tidewater 230 LXF Combines Luxury, Family Friendly Features By Craig Lamb Are you looking for a family friendly, center console fishing rig in the 23-foot class? Your search is over with the 230 LXF from Tidewater Boats. The all-new 230 LXF has a centerline of 23’ with a wide beam spanning 8’ 10.” The boat weighs 3,200 pounds and has a fuel capacity of 95 gallons for peace of mind on long trips. Best balance of performance and fuel … [Read More its Good for You...]

Sports

You Don’t Have to be Greek to be a “Zorba” Fanatic

  You Don’t Have to be Greek to be a “Zorba” Fanatic by Amy Lignor   No, the sport is not called ‘Zorba’, but it most definitely fits for this article’s title. This most unusual sport is actually called ‘Zorbing’, and has caught on like wildfire across the globe. And now, seeing as that the NBA has wrapped, with Golden State proving that they were determined to make amends for last season; and with the NHL closing up shop for the season … [Read More its Good for You...]

Business

Add Value with Summer Home Renovation Projects

  Add Value with Summer Home Renovation Projects by Amy Lignor   There are a whole list of summer activities for you and the kids planned. Most of them, of course, you want to be nothing but fun, such as grilling outside on the patio or swimming in the pool. However, having the backyard pool and patio are two things you really need in place before either of those activities could be enjoyed. And building this area could be a great … [Read More its Good for You...]

Travel

Finding Relaxation in the Most Remote Locations of All

    Finding Relaxation in the Most Remote Locations of All by Amy Lignor   It is a fact that the largest travel locations are also beyond popular. Among the downsides of this fact is that when you’re looking for peace, quiet, and basically a chance to do nothing more than spend time with yourself and, perhaps, one other best friend, the most popular places don’t offer that. In other words, it is the most remote (sometimes most … [Read More its Good for You...]

Green Living

Creating the Perfect Vegetable Garden

  Creating the Perfect Vegetable Garden by Amy Lignor   Many are still dealing with that wintery mix Mother Nature just loves to toss down from the sky this time of year. Yet, that gardener living inside the soul – the one just dreaming of the sunny skies and lazy rainy days that are must-haves in order to grow the best vegetables possible – is already jotting down the facts, tricks and tips they need to know in order to make that … [Read More its Good for You...]