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

For movies opening April 28, 2017

  OPENING THIS WEEK Kam's Kapsules Weekly Previews That Make Choosing a Film Fun by Kam Williams For movies opening April 28, 2017 BIG BUDGET FILMS The Circle (PG-13 for mature themes, drug use, a sexual situation and brief profanity) Suspense thriller about an ambitious executive (Emma Watson) at an unethical, social media company who finds herself increasingly pressured by its power-hungry CEO (Tom Hanks) to violate subscribers' … [Read More its Good for You.....]

Books

Cop under Fire

  Cop under Fire Moving Beyond Hashtags of Race, Crime and Politics for a Better America by Sheriff David Clarke, Jr. with Nancy French Foreword by Sean Hannity Worthy Publishing Hardcover, $21.99 272 pages ISBN: 978-1-617-95857-1 Book Review by Kam Williams “David Clarke refuses to bow a knee to political correctness, and he refuses to give his party over to the hands of black activists whose politics would destroy America. … [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

History Being Sold to the Highest Bidder

  History Being Sold to the Highest Bidder by Amy Lignor   For the longest time, scientists and archaeologists have been confused and bemused by various discoveries they’ve unearthed that offer little or no explanation as to the who, what, and why of the people who created these things or left them behind. Even now, in 2017, there are discoveries being studied; stories that were once legends now have actual bits of proof being found that … [Read More its Good for You.....]

Lifestyle

Finding a Hobby that Fits Your Personality

  Finding a Hobby that Fits Your Personality by Amy Lignor   Although there are many out there who turn to their computers or cell phones as their hobby, there are just as many others who want to be more creative. They want to learn something new and fun to do in their spare time. They’re not looking for cash, they’re looking for a way to relax and ‘get away’ from the daily grind. Of course, when it comes to choosing the right hobby, … [Read More its Good for You...]

Outdoors

Going Flat for Great Fishing

  Going Flat for Great Fishing By Craig Lamb Flats fishing, Just the thought brings to mind the sight of big fish cruising over ultra-shallow water. Your mind also might wander to explosive surface feeding activity as the fish gang bait up on top of the flats. Every inshore angler should know the basics of flats fishing. Flats might not be the most abundant and predominant habitat in your area. What does appeal about flats is that … [Read More its Good for You...]

Sports

“Sin City” Becomes Acceptable?

  “Sin City” Becomes Acceptable? by Amy Lignor   So…what changes will occur if an NFL team hits Las Vegas? Not many, actually. Perhaps more of the ‘contract money’ will be lost considering the blackjack tables ARE right in the vicinity; however, NFL owners seem just fine with the fact that the Raiders will once again wave good-bye to their “Nation” and relocate to Sin City. But when you look at the news headlines, the NFL has and … [Read More its Good for You...]

Business

Buying & Selling: Learning the Art of the Tag Sale

  Buying & Selling: Learning the Art of the Tag Sale by Amy Lignor   When people speak about making a few extra bucks, there is more than one way to skin a cat these days. Perhaps you’re trying to save up for a vacation for the family to take this summer. Perhaps you are looking for collectibles to invest in. Oddly enough, many people do not realize what, exactly, was in Great Grandma’s house when she passed on to a happier place. … [Read More its Good for You...]

Travel

Vacations…Underground

  Vacations…Underground by Amy Lignor   There are millions of spots to visit and sites to see around the world when it comes to vacation time; however, there are also those you can’t necessarily “see.” In this world of digital technology and highly imaginative architecture that creates buildings that are higher and more “glitzy” than ever before, it is important to remember that in ancient times, people were building “down.” Various … [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...]