It would seem Iran is not the only major Middle East economy on the cusp of radical change. If the espoused wishes of deputy crown prince Mohammed bin Salman al-Saud (or MbS as the media have got into the habit of calling him) are realized, the desert kingdom is in for a period of change over the next decade that would be unprecedented in it’s recent history.
Certainly, oil has transformed the kingdom since it was first commercially extracted in 1938 but the culture of Saudi society has been carefully nurtured, protected, even shielded — one might say — from the corrupting influence of the outside world.
A group of fuel tanks in the Ras Tanura oil terminal in Saudi Arabia. If Prince Mohammad has his way, this will someday be a thing of the past in the kingdom. Source: AdobeStock/eugenesergeev.
Yet the days of a close compact between the House of Saud dynastic monarchy and the religious Wahhabi clerical establishment that, in exchange for control over education and the judiciary, has provided the rulers with legitimacy, may be seeing the beginning of its end.
The Prince’s Plan
The new King Salman’s son, Prince Mohammad, believes Saudi Arabia has been addicted to oil, an addiction that has cost it dearly in terms of economic development and progress. Trying to look into the future, he clearly feels Saudi Arabia needs to face up to the march of time before it is too late. Read more
Needless to say, the oil price promptly dropped 3% as the market saw the statement for the hollow, face-saving attempt that it was. Saudi Arabia and the rest of the Organization of Petroleum Exporting Countries (OPEC) have long said they will only consider production cuts if non-OPEC members — for which, read Russia — and new entrants, read Iraq and Iran, will also limit output.
In this corner, the Organization of Petroleum Exporting Countries, led by Saudi Arabia and its government largess. Source: Adobe Stock/Alexlmx.
Freezing output at January levels still leaves the world in surplus and will do nothing to change that situation. Russia’s oil production hit a post-Soviet-era high in January of 10.8 billion barrels per day so, although output for the whole of 2016 is not expected to rise beyond 2015 levels, that is still record output.
Fighting Out of South America, Africa, the Middle East: OPEC
Meanwhile, Saudi Arabia produced 10.2 million bpd in January, below the most recent peak of 10.5 million bpd set in June 2015, but as this graph from Bloomberg shows, even freezing at January levels would be meaningless in the face of strong output from Iraq and the prospect of an additional 1 million bpd from Iran over the coming months.
Fighting Out of the US, Canada, Brazil: Tight/Tar Sands/Deep-Water Oil
OPEC has made no secret of the fact that it is trying to squeeze out of the market what it perceives to be higher-cost producers; such as US tight oil, Brazilian deep water and Canadian tar sands producers, by driving down the price below the new upstarts’ cost of production.
Today in MetalCrawler, major oil exporters Saudi Arabia and the Russian Federation talked about possible cuts in production to combat low, low prices caused by a worldwide glut. Final figures for 2015 showed that US construction had a great year.
Russia and Saudi Arabia Talk Oil
Senior OPEC and Russian oil industry officials had vague talks, Reuters reported, about possible joint action to remedy one of the worst supply gluts in decades, while Saudi Arabia signaled its resolve to allow the market to balance itself.
The latest volley of comments highlighted the intensifying pressure of $30 a barrel oil prices on cash-strapped countries such as Russia, but did not appear to tilt the scales meaningfully towards any concerted action to reverse the price crash from the Saudis and their controlling bloc of votes in OPEC. The Saudis are said to have asked for more “cooperation” on any future production cuts.
US Construction Starts Up in 2015
Dodge Data and Analyticsreported that, for the full year of 2015, residential construction was up 14% to $265.4 billion, beating 2014’s increase by 4%, and non-building (mostly civil projects such as utility work) rose an impressive 23% to $176 billion, bouncing back from last year’s 8% decline.
The Shanghai Composite Index dived 6.9% to its lowest level in nearly three months. The drop led the Shanghai and Shenzhen stock markets to halt trading for the remainder of Monday to avert steeper falls, according to the state-run Xinhua News Agency.
The Dow Jones Industrial Average briefly fell more than 450 points in mid-morning trade, down more than 2.5%, on pace for its largest percent decline on the first trading day of the year since 1932. The Dow also fell below the psychologically key 17,000 level in intraday trading.
Saudi-Iranian Row a Threat to OPEC?
The fallout over Saudi Arabia’s execution of a Shiite cleric is spreading beyond a spat between the Saudis and Iranians, as other Middle East nations choose sides and world powers Russia and China weigh in.
Relations between Saudi Arabia and Iran — two Middle Eastern powerhouses who are both founding members of the Organization of Oil Exporting Countries (OPEC) despite the fact that global bans have, until recently, limited Iranian oil exports — have deteriorated following Riyadh’s execution of Shiite cleric Nimr al-Nimr on Saturday.
Protesters in Iran’s capital, Tehran, stormed the Saudi embassy hours after the execution. The Saudis cut off all diplomatic ties with Iran soon thereafter and have since been joined in breaking off ties with Iran by Bahrain, which cited Tehran’s “blatant and dangerous interference.”
The United Arab Emirates, meanwhile, announced it was “downgrading” its diplomatic relations with Iran. The UAE recalled its ambassador in Tehran and said it would also reduce the number of diplomats stationed in Iran.
Detailed in a Financial Times article, the rumor was that Saudi Arabia would have been willing to cut output to support oil prices if other OPEC, and some non-OPEC producers, matched its cutbacks. Crucially, the rumor went, that would require Iraq, Iran and non-member Russia to cut back along with Saudi Arabia for the “deal” to be acceptable to the Kingdom.
At the end of the day, the other OPEC nations, Russia and the Saudis all decided not to cut output. Or at least they couldn’t come to an agreement to do anything other than stand pat.
Without a doubt, all those countries would have liked to have seen higher prices. Iraq’s production may have roared back after the war there, but at $43/barrel the country is still bankrupt and, according to a Telegraph article quoting RBC Capital Markets, it can’t even pay the salaries of its security forces. Read more
Steel imports into the US were up in October and Saudi Arabia is under pressure to turn off its spigots from fellow OPEC nations.
Steel Imports Up
Based on preliminary Census Bureau data, the American Iron and Steel Institute reported today that the US imported a total of 2,987,000 net tons (nt) of steel in October 2015, including 2,258,000 nt of finished steel, up 5.4% and 1.4%, respectively, vs. September final data.
On the year-to-date, through ten months of 2015, total and finished steel imports are 33,889,000 and 27,438,000 nt, respectively, down 8% and 2% respectively, vs. the same period in 2014. Annualized total and finished steel imports in 2015 would be 40.7 and 32.9 million nt, down 8% and 2% respectively vs. 2014 if the same levels persisted in November and December.
Saudi Arabia Under Oil Pressure
OPEC members including Iran have decided Saudi Arabia’s effort to force out smaller US shale producers by overproducing and lowering global oil prices was a failure and are preparing to press the Saudis directly to pull back on production at the group’s meeting this week.
The big meeting is due in December, the eyes of the world will be upon the assembled dignitaries, will they be able to reach an agreement and what impact will that have on the world? Are we talking about the 2015 United Nations COP 21 Climate Change Conference in Paris?
No, we are talking about OPEC’s summit in Vienna on December 4. In the short- to medium-term the price of oil will have a bigger impact on the citizens of the world than anything agreed to in Paris. OPEC is facing a revolt the likes of which has not been seen since the 1970’s. Many members, indeed most members are at a breaking point and Saudi Arabia has been accused of running the cartel for its own ends against the wishes of the majority.
The club is coming apart at the seems. Algeria’s former energy minister, Nordine Aït-Laoussine, is quoted in the Telegraph as saying the time has come to consider suspending his country’s OPEC membership if the cartel is unwilling to defend oil prices and merely serves as the tool of a Saudi regime pursuing its own self-interest. “Why remain in an organization that no longer serves any purpose?” he is quoted as saying.
The International Energy Agency (IEA) estimates that the oil price crash has cut OPEC revenues from $1 trillion a year to $550 billion, setting off a fiscal crisis that has far-reaching consequences, particularly in the Middle East already riven with sectarian unrest and four civil wars.
The widely accepted aim of Saud Arabia, and a small band of Gulf partners, is to drive US shale producers to the wall and thereby choke off the threat to OPEC’s dominance. If that is the case the battle is proving much harder than was probably anticipated. So far US output has only dropped by 500,000 barrels per day but still stands at 9.1 million b/d, much as it did this time last year. True, there is only so long hedging can keep some producers in business or technology can reduce costs, but the US Energy Department expects a loss of only 600,000 b/d next year, far from a collapse and by then OPEC will have foregone another half trillion dollars.
As the Telegraph points out, the infrastructure and technology in the US remain in place even if some shale producers go to the wall. If oil price move back up to $60+ new firms will come into the market and production will rise again. The US shale industry has become the new swing producer whether Saudi Arabia likes it or not.
Another less well debated target could be to check solar and wind power the paper suggests, both of which are terribly price dependent. The oil price does not directly impact electricity prices but certainly has an indirect effect by its impact on natural gas prices often linked to the oil price and hence natural gas or LNG’s ability to compete with renewables. But the move to renewable is inexorable, driven in some quarters by politicians desire to “do the right thing” and in others, such as China, by the knowledge that more of the same would result in such a widespread health risk that civil unrest could be the end result.
Which brings us back to Paris, the two summits are not unrelated.
Attempts to limit carbon emission have already reduced oil demand. OPEC forecasts that oil demand will keep rising relentlessly, adding 21 million barrels of oil per day (b/d) to 111 million by 2040 as if nothing will change.
Yet, car producers the world over are not pouring billions into electric vehicles to be trendy, they know the internal combustion engine is, in the long term, a dead end. Paris will hasten that trend and as if in recognition the IEA says oil demand will be just 103 million b/d in 2040 even under modest carbon curbs. It would collapse to 83.4 million b/d if global leaders really grasp the nettle. Rather than try to drive other supply sources out of business, the Saudi’s would be better off maximizing their returns for as long as they can, it is after all a finite resource, both in terms of supply and in terms of demand.
The crunch though may be none of the above but the gradually collapsing geo-political state of the Middle East, as governments struggle to maintain budgets in the face of the oil-related revenue collapse.
Most petro economies have become used to huge government largesse, austerity in the form of salary reductions, a break on new hiring, reductions in subsidies or welfare payments could result in unrest in an area not noted for its calm debate in recent years.
Unhappy populations right across the Middle East are more likely to turn to extremism if there are no jobs or prospects. As the paper points out Saudi Arabia, itsel,f has suffered five Isil-linked terrorist acts on it’s soil since May, several of them targeted at oil installations, probably as the terrorist organization also has an eye on raising the oil price. Isil is largely funded by oil revenues and no doubt is also facing a drop in income as a result of Saudi Arabia’s stance. Saudi Arabia is playing a high stakes game, a game that if I were the halftime coach I’d be instructing the team requires a change of tactics in the second half.
Saudi Arabia is taking a massive gamble on the world oil markets. Their “pump at any price” policy has driven oil down to below $50 per barrel and, so far, appears to be having the desired effect of squeezing out marginal producers, particularly in the shale industry, unable to cover costs at that level.
Every spike above $50, as happened last week, is met by a wave of hedging from shale companies. Late last week, US producers locked in new production at north of $50 for 2016 and 2017 delivery. As prices reached about $53, any further rise was limited by sellers locking in prices. Even so only some 11% of expected 2016 production is forward sold according to HIS Energy, quoted in Reuters.
Source: Financial Times
The Saudis had hoped they could drive down the price enough to squeeze out higher cost upstarts like the US shale industry. Indeed, the US government is quoted in the FT reporting that after adding 1 million barrels per day per year of production in every year since 2012. Next year will see the first decline, from 9.3 million bpd to 8.9 million bpd. Read more
In a recent post we looked at the state of the crude oil market, how demand has been weak as a result of refinery maintenance closures in Europe and lower domestic consumption in China. Even though China is buying more crude, it has increased exports of refined oil products depressing prices in the Asian market and hurting regional refinery utilization rates.
The solution would be for crude oil producers to limit output, but with OPEC only controlling a third of world supply and no appetite among any of its member nations to reduce revenue streams, it seems voluntary reductions of any significance are unlikely. Saudi Arabia as the main swing producer is the most likely to adjust output and a report this week in the FT states output was reduced by 400,000 barrels per day in August from 10 million barrels per day to 9.6 m b/d, the fourth-largest one month drop on record.
Well, sure, when they are just stories – but if there is the possibility that they are a fair reflection of real events and that there is the possibility the consequences could affect us all, they become less curiosity and more a source of alarm.
So portends an article in the Telegraph this week, reporting a meeting said to have taken place between Russia’s Vladimir Putin and Saudi Prince Bandar bin Sultan, head of Saudi intelligence, three weeks ago in Mr. Putin’s dacha outside Moscow. The gist of the story is the Saudis are seeking support from Russia in pressuring Syria’s President Assad to stand down in return for a Saudi-Russian pact on the oil price and agreement on “managing” the European market for oil and natural gas/LNG.