Saudi Arabia is the middle of two ‘wars” – religious (from The Kingdom’s perspective, Iran is a large Persian country sitting at the easternmost edge of the Middle East, from where it projects power across the Arab world by manipulating and exploiting the region’s Shiite communities and other minorities)

Via Stratfor,

From Saudi Arabia’s perspective, Iran is a large Persian country sitting at the easternmost edge of the Middle East, from where it projects power across the Arab world by manipulating and exploiting the region’s Shiite communities and other minorities. The Saudis are mostly members of the Salafist movement (a subset of the Sunni branch that is highly sectarian), which only increases their suspicions about Tehran’s overall intent. Quite simply, the Saudis see the Shia as deviants trying to undermine Islam.

Saudi Arabia hoped that the civil war in Syria would strike a critical blow against Iranian influence in the region. Instead, the conflict has created more problems for Riyadh. Similarly, the expectation that the emergence of the Islamic State would undermine Iranian influence in Iraq and the Levant has proven false. Instead, the group has threatened the Saudis, who have already been had to deal with al Qaeda’s influence on the domestic and regional front.

With the Saudis focused on battling the Shia, the Muslim Brotherhood and now the Islamic State, an important development has taken place in Yemen, to Saudi Arabia’s immediate south. The Iranian-backed al-Houthi movement is no longer a regional rebel subset of the Zaidi sect; it has become a mainstream national player, seizing the Yemeni capital city of Sanaa in mid-September and continuing to expand.

The Saudis were caught off-guard by the al-Houthi surge in Yemen, a country that has been beholden to Riyadh for decades. The phenomenal rise of the al-Houthis was possible because the Saudis lost influence with the Yemeni tribes and because the old ruling elite in Sanaa had been badly fragmented by the fall of former President Ali Abdullah Saleh. The Saudis feel that while they were negotiating with the Iranians on regional security, Tehran double-crossed them by quietly supporting the al-Houthis, enabling them to impose their will on Sanaa and beyond.

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And geopolitical (it appears to reveal that the kingdom is willing to tolerate Brent prices between USD80-USD90/bbl for a period of 1-2 years in order to achieve two aims: to slow increases in US tight oil production and to pressure other OPEC members to contribute to supply discipline.)

Of course, it’s not just religious ‘wars’, there is now the global oil ‘wars’ underway – as Stratfor discusses in crucial detail:

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As Deutsche Bank notes, Hints of a Saudi strategic shift can be seen in the numbers

The emerging shift in Saudi strategy means that it may be stepping away from its predominant role as the sole provider of swing capacity in the market. This role encompasses both curtailments in times of oversupply as well as increases in response to unplanned supply disruptions. While both activities entail costs either in the form of reduced revenue or idle capacity, the indicated shift should be understood as a rejection of the former rather than the latter, since only Saudi Arabia holds any significant spare capacity. As of last month, Saudi spare capacity is estimated at 2.7 mmb/d against an estimated 0.8 mmb/d for all other OPEC members combined.

According to Reuters, this purported shift in strategy has been communicated by Saudi officials in meetings in New York last week. It appears to reveal that the kingdom is willing to tolerate Brent prices between USD80-USD90/bbl for a period of 1-2 years in order to achieve two aims:

  1. to slow increases in US tight oil production and
  2. to pressure other OPEC members to contribute to supply discipline.

If true, this would mark a significant divergence from the acceptable range of prices previously stated by oil minister al-Naimi as being “$100, $110, $95.” The possibility of such a change is made more plausible by analysis carried out by Deutsche Bank Emerging Markets Research which showed that Saudi Arabia is equipped with sufficient government assets to weather the budget deficits which would result from Brent at USD83/bbl for a period of 7-8 years, assuming no changes to nominal spending, Figure 12.

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While North American production cannot be entirely suppressed by Saudi Arabia, it appears its goals are to slow it dramatically as Reuters confirms their comment that The Kingdom “will accept oil prices below $90 per barrel, and perhaps down to $80, for as long as a year or two”.

As DB continues, while Saudi efforts to preserve market share may be viewed as pure conjecture, recent data does suggest efforts are underway to preserve market share.

As a consequence, total OPEC production relative to its 30 mmb/d quota has risen from virtual compliance with the quota from January to May, to one where as of last month the cartel is producing between 700-900 kb/d above its agreed production allocation.

…and we can observe that the differential of Saudi Arabia’s Arab Light blend versus the Oman/Dubai average for Asian deliveries has fallen sharply from a premium of USD1.65/bbl for September loadings to a discount of USD1.05/bbl for November loadings. This suggests that Saudi Aramco is determined to maintain current levels of exports at the expense of sales prices achieved. This represents the sharpest discount since the -USD1.25/bbl level observed in December 2008, during a quarter in which global oil demand contracted by 3.0 mmb/d, in contrast to the current quarter when we still expect oil demand to grow by 0.8 mmb/d.

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The question is – how long can the US Shale Oil industry remain afloat if the current depressed prices are not transitory but long-term…

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