May 22, 2018
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In This Newsletter

1) How to Save the Saudi Golden Goose (The New York Times)
2) Upcoming Iran Sanctions Decision By Trump Looms Large Over Oil Market (Forbes)

3) Can Anything Stop Oil Prices From Going Higher? (
4) U.S. Shale Forecast Looks Up, But Debt Looms (Forbes)
5) U.S. Withdraws From Iran Deal; Here's How Sanctions Will Impact Oil (
6) Geopolitical Analyses of the U.S. Withdrawal from the Iran Deal in Arab News:
Iran’s isolation increases thanks to misguided Israel attack 
     Iran’s neighbors must be consulted on future of nuclear deal

Can Anything Stop Oil Prices From Going Higher?
(also on

With the price of Brent pushing toward $80 per barrel, market watchers are beginning to wonder if there is anything that can stop rising oil prices this spring. This is a far cry from last spring and summer when Brent prices barely broke the $55 per barrel mark. Now, Bank of America is even talking about seeing oil prices rise to $100 per barrel.

There are three major factors influencing rising prices right now:

          1. US President Donald Trump’s decision to reinstate
              sanctions on Iran

          2. The collapse of Venezuela’s oil industry and
          3. The OPEC/Non-OPEC production cut agreement

1. Iranian Sanctions

Even though it's not clear whether the countries and companies that have been purchasing, transporting and insuring Iranian oil will all comply with US sanctions, many are taking the Trump administration seriously and have begun requesting exemptions or discussions for alternative sources of oil.

The CEO of ENI (MI:ENI), the Italian oil company, expressed dissatisfaction with President Trump’s decision to pull out of the Iran deal. However, he clarified that even though ENI had been in talks to potentially develop oil and gas fields in Iran, it currently has no interests there and does not plan on making any investments in Iran. Notably, the CEO said ENI was not interested in investing in Iranian energy development because of unfavorable terms offered by Iran, not because of President Trump’s decision to reinstate sanctions.

Uncertainty over the fate of Iranian oil exports continues to push oil prices up. The biggest player in Iranian oil imports is China, which is responsible for about 24% of Iran’s total oil exports.

We are likely to see some sort of negotiation going on between the US and China to try to push the Chinese to reduce their Iranian oil imports. If the Trump administration succeeds in convincing China to reduce its imports of Iranian oil then we can expect oil prices to trend higher. If China continues to import Iranian oil at the same rate—or increases the amount it imports from Iran—then oil prices may start to trend downward as the price premium from the Iran deal announcement fades.

2. Collapse of Venezuela's Oil Industry

The impact of Venezuela’s collapsing oil industry cannot be overstated. During the past week ConocoPhillips (NYSE:COPsuccessfully expropriated Venezuelan oil in the Caribbean through a legal judgment to pay a debt, PDVSA abandoned the Isla refinery in Curacao and Venezuela purchased crude oil on the market to exchange with Cuba for goods. These are all further signs of the continuing collapse of Venezuela’s entire oil industry. The crisis will likely be reflected in further production declines in coming months.

3. OPEC/Non-OPEC Production Caps 

The OPEC/Non-OPEC production cut agreement continues to support higher oil prices. Although Saudi Arabia has indicated that it intends to increase production to prevent market dislocation that could be caused by geopolitical events in Iran and Venezuela, Saudi Arabia has not yet made any actual moves. It seems that the market will have to wait for official word from OPEC when the organization meets in a little over a month.

Possible Constraints on Rising Prices

There are some signs that could stop, or at least slow, climbing oil prices. One of these is Mexico’s annual oil hedging process. The price point for these hedges is not yet known, but the process increases market volatility and has been known to cause sharp declines in the price of oil in the past.

US shale oil production is another wildcard. Production levels have exceeded predictions, but prices are still up.

On the other hand, limits on infrastructure and personnel in shale oil areas may be forcing some producers to sell oil at a discount. In fact, the WTI-Brent spread reached $8 per barrel on Tuesday, a three year high.

Although more North American pipelines are being built, until they come online, WTI will continue to be sold at significant discounts and this will constrain rising WTI prices.

U.S. Shale Forecast Looks Up, But Debt Looms
(also on

U.S. Withdraws From Iran Deal; Here's How Sanctions Will Impact Oil
(also on

Yesterday, US President Trump followed through on promises he made as far back as his 2016 campaign, and he began the process of reinstating sanctions on Iran. This could signal the end of the agreement reached in 2015 between six countries and Iran which was called the Joint Comprehensive Plan of Action (JCPOA).

Oil markets were volatile leading up to the announcement and reacted strongly to different leaks throughout the morning and early afternoon. Prices fell when CNN reported that the President would not end the Iran deal. Oil temporarily went below $74 for Brent and almost as low as $68 for WTI, but then recovered somewhat when another news agency contradicted that report.

Both benchmarks rose after the announcement, but did not reach opening levels before the market closed. Apparently, by the time President Trump made the announcement, the market had already priced in a decision to re-instate sanctions. Despite the potential for one million barrels of Iranian oil per day to leave the market, the price of oil did not rise as a result of the news.

For long term traders, how do the logistics of re-instating sanctions impact the market?

Some sanctions will be fully reinstated after a 90 day period and additional sanctions will be fully reinstated by 4 November, 2018. There is a 90 day period for Iranian financial institutions to cease purchasing dollars. After 90 days sanctions will be reinstated on institutions purchasing and or holding Iranian currency outside of Iran. There will also be sanctions on the purchase of Iranian sovereign debt and on the facilitation of sales of this debt.

This will make the purchase and sale of Iranian oil more difficult because Iran requires that all oil sales go through Iran’s central bank. There are ways to work around using dollars in the sale of oil, but they are not preferred since the dollar is the currency used in the vast majority of global oil transactions.

On 4 November, sanctions will be fully reinstated on Iran’s national oil company, NIOC. Also on that day, sanctions will be reinstated that are designed to prevent carriers from purchasing insurance on tankers of Iranian oil.

This is important, because even if Iran could get around the oil sanctions on the NIOC, customers and shipping companies would be unable to buy insurance from U.S. institutions to cover the risk of transporting this oil. Oil must be insured to be shipped, so these sanctions will further impede any oil exports.

It's possible that European or Chinese institutions will offer insurance for Iranian oil cargos, but the U.S. could attempt to sanction American companies that do business with foreign companies that insure Iranian oil.

Despite the details, the Trump administration seems to be taking a strong stand, claiming that the sanctions will be reinstated immediately, though that’s not exactly how it will work. National Security Adviser John Bolton said the old sanctions are going back into place immediately. Richard Grennell, the new ambassador to Germany, said German businesses working with Iran should wind down operations now.

Iran's isolation increases thanks to misguided Israel attack

When President Donald Trump announced last week that the United States would reinstate sanctions on Iran and effectively end American involvement in the Joint Comprehensive Plan of Action, the big question was whether his administration could convince other countries and global businesses to comply. It is still too early to know, but watching the initial reactions to Trump’s decision and to Iran’s resulting rocket attack on Israel, it seems Iran has fewer friends than some thought.

Trump faces a small challenge in unilaterally reinstating the Iran sanctions. The government can enforce the sanctions against American businesses and any business with a serious nexus to the US; however, it cannot enforce unilateral sanctions globally. As a result, for the sanctions to be truly effective, the Trump administration needs to encourage cooperation from other governments and international firms.

Richard Grenell, the recently confirmed US Ambassador to Germany, demonstrated the White House’s position in one of his first acts. He said: “German companies doing business in Iran should wind down operations immediately.” However, the effectiveness of his warning or request, depending on how one sees it, is somewhat reliant on the voluntary cooperation of Germany and German firms. The US can punish American interests but not those unconnected to Washington. 

The Trump administration will struggle to garner cooperation from some countries that have close economic ties with Iran. For example, the Chinese market provides a major piece of Iran’s revenue, with about 24 percent of Iranian oil exports going to China. Currently, the US has two other major issues on the table with China: Trade and North Korea. It is possible the US may leverage one of these other issues to gain China’s cooperation against Iran, but that is unlikely. The other issues are seen as more vitally important to American interests today.

Airbus, the European aviation giant, is apparently considering whether it can and should supply commercial aircraft to Iran. This comes after America’s Boeing was forced to end its plan to sell to Iran. Boeing knew from the time it began negotiations with Tehran that it was entirely possible it would not be allowed to deliver the planes, and it made some contingency plans, so the loss is not as severe as some say. However, Airbus would like to benefit from Boeing’s misfortune, so it must decide if it will risk the ire of the American government. If so, it must complete the sale before the sanctions officially come into effect again. However, some Airbus plane parts are actually US-made, so the sanctions could still apply.

Now Iran is also pushing back. The first major step taken by Tehran — besides the usual burning of US flags and chanting of “death to America” — was a rocket attack against Israel by its forces in Syria. This would not be the first time a country has reacted to international (and particularly American) action by attacking Israel. Saddam Hussein’s Iraq did the same thing during Operation Desert Storm. Then, as now, a rogue regime hoped to garner support for itself by attacking Israel. Hussein’s intention was to draw Arab support away from the coalition, but it did not work. Similarly, Iran is hoping to draw support (most likely European support this time) by attacking Israel.

But it is not working. In fact, the attack on Israel may have further isolated Iran and won support for Israel. After Tel Aviv responded to the Iranian attacks by destroying related targets in Syria, Bahraini Foreign Minister Khaled bin Ahmed Al-Khalifa tweeted: “Every state in the region, including Israel, is entitled to defend itself.” And, in Europe, Britain also came to Israel’s rhetorical defense against Iran.

Even Russia, an ally of Iran and the great protector of the Assad regime, was said to be on board with Israel’s counter-attacks in Syria. It is probably no coincidence that Israeli Prime Minister Benjamin Netanyahu was in Moscow meeting with Russian President Vladimir Putin just before the escalation. Russia may be supporting the Assad regime in Syria, but it has other interests in the region that it wants to maintain.

There is a joke among conservatives in the US that perhaps President Barack Obama will one day be known as the leader who solved the Arab-Israeli conflict. After all, he more than anyone else pushed through the JCPOA, which essentially realigned allegiances in the Middle East. Iran’s military infiltration in Syria and Iraq and through proxies in Lebanon and Yemen has turned the tables on traditional regional alliances. It seems that the JCPOA has made friends, or at the very least associates, of anyone who opposes Iran. 

One thing is certain: It is not a good sign for Iran if Bahrain, Britain and Russia are all backing Israel in this fight.

Iran's neighbors must be consulted on future of nuclear deal

As the world waits for US President Donald Trump’s decision on whether he will reinstate sanctions on Iran, one part of the world cares most. That region, of course, is the Middle East, where certain countries fear an expansionist Iran becoming a nuclear power. To some Middle East nations, such as Saudi Arabia, Israel and the UAE, the current antagonistic regime in Iran represents a genuine threat.

Yet not one regional neighbor of Iran participated in the negotiations that led to the 2015 Joint Comprehensive Plan of Action (JCPOA). They were not invited, even though the purpose was to dissuade Tehran from pursuing the types of weapons that would terrorize them first before any other nations. Rather, the negotiations were led by then-US Secretary of State John Kerry and counterparts from Russia, the United Kingdom, France, China and Germany.\

The whole spectacle of six non-Middle Eastern countries, dubbing themselves the P5+1 and negotiating for the security of a region in which they do not sit, was reminiscent of the early 20th century. By now the actions of Britain and France, with the assent of Russia, surrounding the Sykes-Picot Agreement are well-known and much ridiculed. During the First World War, European powers thought it acceptable and wise to create borders and divide a region far away from themselves. Not only was it unreasonable, it was also unwise.

In 2014 and 2015, six countries not in the Middle East believed it acceptable and wise to set terms with Iran that most impact Iran’s neighbors. It was not wise. After all, there is no threat of conflict between China and Iran, Russia and Iran, the UK and Iran, France and Iran, or Germany and Iran. The P5+1 nations were not foremost concerned with regional security or peace. For the most part, they were concerned about business and economics.

The best evidence for this is simply the makeup of this P5+1 group. The P5 represents the five permanent members of the United Nations Security Council. These are also the five countries whose ownership of nuclear weapons is accepted by most nations through treaty. This may be sufficient reason for them to be included in the negotiations — but then Germany was included too.

Germany is not a military power. Germany is not a permanent member of the Security Council. Germany does not have nuclear weapons. What Germany has is a huge economy, business dealings with Iran and the desire for more business dealings with Iran. The whole negotiation presented an image, at times, of an attempt to open and encourage more commerce.

That is a reasonable goal for China or a European power, but not for a Middle Eastern country that has experienced the belligerent rhetoric of the Iranian regime and the violent activities of Iran’s terrorist proxies. Middle East countries care about their security before they care about trade with Iran. Their motivations are markedly different from those of the P5+1 that negotiated the JCPOA.

This is precisely the problem. It was a deal negotiated for the world by parties with certain objectives — trade and the illusion of peace — while the Middle East has another priority: Security. Iran’s neighbors are going to protect themselves, regardless of what world powers tell them or decide for them.

This past weekend, US Secretary of State Mike Pompeo traveled to the Middle East, where Israeli and Saudi leaders could make their cases to him concerning Iran. Then, on Monday, Israeli Prime Minister Benjamin Netanyahu presented 100,000 secret documents that he claimed Mossad took from Iran, allegedly detailing Tehran’s nuclear weapons program. He made the speech mostly in English, for the world to hear. That is almost all Middle East leaders can do at this point: Petition the United States and the other P5+1 nations and make presentations to the world.

Of course, there is one other thing Middle East countries can do to protect themselves. They can increase spending on defense, prepare their militaries and strike at the Iranian terrorist proxies on their borders. This is exactly what the region’s countries have been forced to do because they have been left out of the negotiations.

Now, pundits across America and in Europe are talking about a renegotiation of the JCPOA. Both President Emanuel Macron of France and German Chancellor Angela Merkel recently visited Trump, presumably in part to discuss Iran. The hot topic in Washington seems to be that the deal could be preserved in a revised form, and it is possible that this is Trump’s preference. The president has refused to rule out renegotiating the nuclear deal and has reiterated that it remains a possibility. Iranian President Hassan Rouhani apparently told Macron that the deal cannot be renegotiated, which only means that he is driving a hard bargain.

But if the P5+1 plan to push Iran for new terms, they would be wise to include Iran’s neighbors in the process this time. The only truly effective deal would necessarily take into account the security concerns of Middle Eastern nations. Any other deal will always remain tenuous at best. We learned that much from Mark Sykes and Francois Georges-Picot.

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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Entrance of Jubail industrial city in Saudi Arabia
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