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June 5, 2018
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In This Newsletter

1) Quoted in Saudi Arabia's sleepy city offers prince a cautionary tale (Financial Times)
2) Oil Prices Plummet After Saudi Arabia And Russia Signal Intent To Raise Production (Forbes)

3) What's Really Motivating OPEC Members To Increase Oil Production? (Investing.com)
4) Arrest Of Feminists Threatens To Detail Saudi Economic Plans (Forbes)
5) 5 Reasons Shale Production Still Isn't Affecting The Price Of Oil (Investing.com)
6) Peace can only be achieved if all sides make concessions (Arab News)
Oil Prices Plummet After Saudi Arabia And Russia Signal Intent To Raise Production
(also on Forbes.com)



What's Really Motivating OPEC Members To Increase Oil Production?
(also on investing.com)

Oil prices fell last week and have continued to fall this week after Saudi Arabia and Russia announced that OPEC and its non-OPEC partners (together termed OPEC+ hereon out) would consider increasing production. The oil ministers of the UAE, Kuwait and Saudi Arabia plan on discussing options in Kuwait this weekend.

Some attribute these actions to pressure from U.S. President Donald Trump, who tweeted in April that OPEC was to blame for higher oil and gasoline prices. Last week Democrats in the U.S. Senate tried to blame President Trump for higher oil prices, saying he did not take a hard enough stance towards OPEC.

Two days later, Russia and Saudi Arabia announced that, after private talks on the sidelines of the St. Petersburg International Economic Forum, they would consider raising oil production by a yet to be determined amount at the regularly scheduled June OPEC meeting. Oil futures immediately began to fall and prices fell through the rest of Friday trading.

At the main meeting in St. Petersburg, OPEC Secretary General Mohammad Barkindo gave a nod to President Trump, saying that, “We pride ourselves as friends of the United States,” and went on to recall that in the past the United States has called on OPEC to increase oil production in order to lower prices. What Barkindo did not say was OPEC+ would act to increase production as a result of statements from U.S. government officials. In fact, U.S. officials were not even the first to complain to OPEC about rising oil prices. India was one of the first nations to call Saudi Arabia with concerns about rapidly rising oil prices in May.

Instead of assuming that OPEC+ is bowing to pressure from the United States and other consuming nations, market watchers should ask, “What underlying motivations do OPEC+ countries have to support an increase in oil production?” Unless these oil producing countries fear military or economic retribution from the U.S. or some other economic consequence, politically motivated statements from U.S. politicians delivered over Twitter or by grandstanding outside of a Capitol Hill gasoline station are immaterial to the producing countries. The oil producing countries are motivated, first and foremost, by their own interests—revenue, the health of their own oil industries and their own domestic political situation.

As a group, OPEC+ also has the added motivation of group solidarity. By keeping the group together, its leaders (Saudi Arabia and Russia) gain power. Therefore, the most important reason OPEC+ has for seeking a mild increase in production is to maintain the integrity of the original production cut agreement and the institution that has grown around its implementation and maintenance.

Since May 2017, certain countries have been angling to either get out of the agreement or for special permission to produce more oil. These countries have included Kazakhstan, Iraq, Ecuador and Russia. Saudi Arabia and other OPEC heavyweights want to keep the OPEC+ group together—the UAE has pushed especially hard to institutionalize it—because with more barrels of oil the group has a greater chance of impacting the market. Ensuring that Russia, Kazakhstan and Mexico stay involved is especially key.

OPEC+ has technically cut more barrels of oil than the original deal intended and the group is facing the possibility that even more oil will come off the market as U.S. sanctions on Iran return and Venezuela continues to decline. With this in mind, OPEC+ can keep the deal intact and also permit certain producers with spare capacity to increase production. Oil prices would decline slightly, but not nearly to the levels seen during the height of the production spree in 2015 and 2016.

U.S. politicians whining about a 20-cent increase in the price of gasoline before the Memorial Day holiday hardly registers on their list of concerns. On the other hand, it behooves Barkindo to reference the United States in his remarks, not because it is a true calculation in OPEC decision-making, but because the statement promotes good relations with the United States.

Politicians in the U.S. may spin this as a win on their own political scorecards, but it actually makes Barkindo and OPEC look powerful because despite all of the oil production in the U.S., politicians still see it as necessary to come to OPEC and ask the cartel to lower oil prices.

Each of the actors here is playing their own game—both with each other and with the media. Market-watchers, however, need to see through this rhetoric in order to make intelligent decisions about where they think the oil market is truly heading in the future.

Arrest Of Feminists Threatens To Derail Saudi Economic Plans
(also on Forbes.com)





5 Reasons Shale Production Still Isn't Affecting The Price Of Oil
(also on investing.com)

Around this past new year, oil prices were climbing higher and many analysts predicted that a rush of new production from U.S. shale oil fields would, over time, put a damper on prices Nearly six months into 2018, U.S. shale oil production continues to grow, yet it still does not seem to be impacting prices as predicted. This can partially be explained by geopolitical events that have pushed prices up, but it is also a result of some serious and systemic impediments facing the U.S. oil industry.

There is a possibility that each of these impediments could change in coming months. If they do, the U.S. shale production numbers and the price of oil will change as well.

1. Pipeline infrastructure

Pipelines in regions where shale oil is produced are running at around full capacity. This has caused problems for smaller oil producers who have to pay more to transport their oil. In fact, producers who do not have contracts in place for pipeline transportation have been forced to sell their oil at a discount. These types of pipeline constraints have actually plagued the U.S. oil industry for years and have forced companies to ship crude in trucks or by rail, two modes of transportation that are more expensive and more dangerous than pipelines.

Now, it seems this bottleneck may be ending. Several new pipeline deals have been announced and other pipelines are already under construction. It is possible that by the end of 2019 the price to transport U.S. oil will have fallen significantly and greater volumes of U.S. oil will be able to reach the market. This would mean that U.S. producers would be able to sell their product without the current discounts (up to $13 off per barrel for some oil, according to some reports). It would also mean that U.S. oil would reach ports more quickly. Improved pipeline infrastructure could make the entire U.S. oil industry more efficient.

2. Ports

U.S. producers have only been free to export their crude oil since the beginning of 2016 and most ports are not equipped to handle the largest tankers (VLCCs) which carry up to 2 million barrels of oil. Most ports capable of exporting oil can handle ships that carry less than half that amount. Only the Louisiana Offshore Oil Port (LOOP) can accept the VLCC tankers for export at present, though there are plans to dredge other ports, such as Texas' Corpus Christi, if funding can be accessed. The lesser capacity of most U.S. ports is another limitation on the efficiency of the U.S. shale oil industry.

3. Personnel and Supplies

Producers in shale oil regions have faced personnel constraints for months now. Companies are paying a premium for truck drivers, roughnecks, welders and other similar positions. There has also been a shortage of sand which used in fracking, although reports are that new sand mines are in the process of alleviating this constraint. Though we have seen an increase in production of U.S. shale oil, the increase is not as high as it might have been without such constraints.

4. Crude grade

Most important to consider, however, is whether there is a sufficient market for even more U.S. shale oil. The oil produced from fracking is a very light type of oil. U.S. refineries are not designed to process so much light crude. Some mix this crude with heavier grades, but the process is not ideal for the refining needs. Building new refineries is almost impossible in today’s regulatory climate. The U.S. has not built a new refinery since 1977, although two small refineries have been permitted and are under construction in South Dakota and south Texas. (Some refineries have expanded their facilities, such as Motiva in 2012 and Valero (NYSE:VLO) in 2017).

Other markets for light crude appear to be saturated as well, except, apparently, for China. According to an opinion piece by an S&P Global Platts content director, independent Chinese refineries want more of the light crude oil that the U.S. shale oil industry produces.

5. Trade War Risk

As of now, the U.S. has only sent two VLCC tankers to China with U.S. crude, but, as U.S. infrastructure constraints ease, there could be more. On the other hand, the amount of crude Chinese independent refineries can import depends on the will of the Chinese government, which issues import licenses twice a year.

It is entirely possible that U.S. crude oil exports to China could become a pawn in the ongoing trade negotiations between China and the U.S. In that case, politics, not the industry, might determine the size of the market for U.S. oil.


Peace can only be achieved if all sides make concessions

Last week, United States Senator Rand Paul spoke about the prospects for peace between Iran and its neighbors. The setting was a hearing of the Senate Foreign Relations Committee, at which Secretary of State Mike Pompeo testified. Paul argued that, to achieve peace with Iran, it is necessary for the opposing regional interests to participate in any negotiations.

Paul tends to think differently about foreign policy than his fellow Republicans. He generally opposes military intervention around the world and always questions the efficacy of interventions, regardless of which president ordered them. At this hearing, Paul spoke to Pompeo and argued that the US needs to change its method of negotiating with Iran. In particular, it must better understand the interests of all sides involved, not just the interests of the US.

The Joint Comprehensive Plan of Action negotiated between Iran and the P5+1 countries in 2015 was destined to fail, according to Paul, because countries like Israel and Saudi Arabia were not asked to participate. I have previously argued that Israel, Saudi Arabia and other regional leaders must be included in any negotiations with Iran because their interests are at stake. The senator took a different perspective: He argued that it is necessary to include the countries Iran opposes in order to convince Iran to make actual changes.

The ultimate goal of the sanctions and negotiations with Iran is peace. Ideally, peace would be achieved without a regional arms race and without a conflict precipitating concessions. The best way to pursue such peace, if it is possible, is through diplomatic negotiations. After the US, under President Barack Obama, gave away $100 billion in cash to Iran as an incentive to sign the JCPOA and release some American hostages, Paul wondered “what are the next inducements to get (Iran) to sign?” The goal, according to the senator, is not to get Iran to just sign a deal, but to abide by an agreement — a goal the US neglected when it handed over all of the cash at the start.

The solution to incentivizing Iran that Paul described is quite novel, at least among the elites of Washington. He sees regional negotiations as key to the successful implementation of any agreement. “If you leave Saudi Arabia out of (negotiations) and you leave Israel out of (negotiations), and you look at Iran in isolation — that’s not the way (Iranians) perceive it,” he explained. His point is that, while we all want Iran to forego nuclear technology and ballistic missiles, we must be realistic and expect that there will need to be concessions all around.

The Iranian regime maintains power in large part through perpetuation of the “revolution,” which it started in 1979. It continues to present itself to the people of Iran as an opponent to external, foreign powers. Traditionally those powers were the US and the UK; also included was Israel. Today, Saudi Arabia has taken a place among those foreign powers in the eyes of the Iranian rulers.

The Iranian regime has created for itself an image as the opposition to these powers. Now it is an essential part of the continuing “revolution” for Iran to act against these powers and, in particular, against the regional powers of Israel and Saudi Arabia. Therefore, Iran will never truly take the steps necessary to ensure regional security unless it can be seen as obtaining concessions from its near neighbors.

While Paul may be lacking in some historical knowledge about the conflicts between Iran and its neighbors and may not have complete information about the nuances, he did make a very important point about the war in Yemen. He said: “Iran’s not going to stop (arming the Houthis in Yemen), but they might if you sat them down with the Saudi Arabians and said ‘this arms race doesn’t make sense’.” Traditionally, wars were ended when either one side surrendered or both sides gave up in exhaustion. In either case, the enemies must be at the negotiating table seeking peace. 

Peace in Yemen will not be achieved simply because Pompeo demands that Iran withdraws. Even US sanctions will not be powerful enough to force peace in Yemen, and the US will never participate in an invasion. Peace will be achieved when all of the parties involved in Yemen — including Iran and Saudi Arabia — negotiate a settlement. Iran knows this.

There are no illusions that Iran will become a friendly partner any time soon, at least not with the current regime in power. However, if Iran is to be engaged with diplomatically — as the P5+1 countries have done — it must be engaged appropriately. That is only possible when Iran sees Israel and Saudi Arabia participating in the negotiations. 

About Ellen R. Wald, Ph.D.

A consultant and columnist on geopolitics and energy markets, Ellen writes regularly for several major publications. She is the president of Transversal Consulting and an adjunct professor of social science at Jacksonville University where she teaches Middle East history and policy classes. 
 



Dr. Wald is a frequent commentator on radio and television programs. She offers discussion and analysis of contemporary energy issues, with special emphasis on the Middle East. To arrange a media appearance or to discuss her consulting services, please contact her through her website.
 
About "Saudi, Inc."
 
“Saudi, Inc.” presents the history of Saudi Arabia through the central figure of Aramco, the oil company that brought riches, success, and regional dominance to its ruling family, al Saud.  It will be released in 2018, as Saudi Aramco prepares to launch its much-anticipated IPO, expected to be the largest in history with a possible valuation of up to $2 trillion. The book debut will also come amid the Kingdom’s massive investment in its Vision2030 plan for economic diversification; the rebirth of an economic and diplomatic relationship with the U.S. worth hundreds of billions of dollars in investment in both directions; and preparation by the next generation to take leadership positions in the Kingdom – transforming society, business, and the state.
 
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Photo of the Week
 
On May 29, 1933, Saudi Arabia & Standard Oil of California (now Chevron) signed a concession agreement allowing Socal to search for oil in the eastern part of Saudi Arabia. Pictured above are King ibn Saud's finance minister, Abdullah Sulaiman & Lloyd Hamilton of Socal
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