Russia's voice in the oil debate is vital for progress

Up until early August, much of the excitement around the resurgence of oil prices this year had been lost after market participants began noticing cracks in the sustainability of the moves citing OPEC members being at loggerheads with each other over the exclusion of Iran from a deal that looked set to freeze the production of oil.

Saudi Arabia, the de facto leader of OPEC, insisted on their inclusion saying Iran might use the opportunity to gain market share that could erode the position of other members but mainly itself. Iran countered by saying it had been sanctioned from trading its oil with the rest of the world and was in the process of mending its trade balance that had suffered badly as a result.  

The dispute between the two threw the power of OPEC into jeopardy by opening the door to retaliatory attacks against one another with Riyadh going as far to say to would increase oil output to record highs in a veiled threat intended to undermine Tehran.

But along came Russian oil minister Alexander Novak who suggested his country was open to revisiting the prospects of negotiating a production freeze after a meeting held in April between them and OPEC members fell through leaving producers in limbo. Novak said OPEC could possibily use an upcoming informal meeting between members to discuss the way forward.

Putin Joins "OPEC Headline" Fray, Pushes For Oil Production Freeze https://t.co/Nx725kAdzO

— zerohedge (@zerohedge) September 2, 2016

This revived up the bulls although only for a little while as the bickering flared up with Saudi Arabia proudly announcing it had reached an all time high in oil production for the month of July. The on and off commentary that's been swirling around since Novak made the comments has driven uncertainty off balance and dissuaded participants from taking a view on either direction.

However things look set to get interesting with Russian president Vladimir Putin adding his voice to the debate and throwing his weight behind reaching a deal without the inclusion of Iran. He went further to express empathy for Tehran saying the country has increased oil production from a low base and the effects of generating profits through oil revenue would be an added boost to its economy.

I've stated previously in the past that Saudi Arabia had abused its position in OPEC to suit its own economic needs while overlooking the distress in of others inside the group and it's bullyboy tactics threaten to tear apart the organisation with the possibilities of members "cheating" on the agreement to see higher oil prices.

Needless to say, Russia's support for Iran gives confidence to those who are of the belief that a production freeze is likely because it pits two giant oil producing nations against one another without creating conflict within the organisation. Russia may not form part of OPEC but the combination of their supply with that of OPEC equates to roughly 50% of the world's oil supply. Their participation in the deal is an absolute necessity for both OPEC and themselves.

And in saying this, Moscow can't afford to slip back on the economic work its done in alleviating the hardship suffered from its own sanctions imposed by the West after it annexed Crimea. Optimally it would benefit greatly if oil prices sat above $60 yet we still need to see them retain those levels with a degree of certainty that they'll stay above there.  

A leader as powerful as Putin weighing in on the debate highlights the urgency of finding resolve in the current environment.

Will Saudi Arabia's gesture of goodwill be received well by OPEC?

OPEC's bi-annual meeting kicked off today in Vienna with market participants not expecting any specific resolution to be passed after the previous two meetings drove divide between members that deemed the collusive oil body defunct at controlling the price of oil.

At the head of the division is de facto leader Saudi Arabia whose steadfast conviction in its belief that a lower oil price would drive away competition from new entrants that found opportunity in the US in the form of shale gas. However the voice of concerns from other economically vulnerable members it tried to brush aside is coming back to haunt it with the latest meeting demarcated as crucial if it wishes to amend broken ties that have the potential to unseat Riyadh as a major influence in the oil market.

The obvious casualties have been Venezuela and Nigeria who were the first to propose an emergency meeting called before the planned December 2015 conference appealing to Saudi Arabia to pull back from the current stance due to the harmful effects it was having on both their economies. It was even suggested that Russia join the meeting in a hope that the combined effort that totals roughly half the world's oil output would drive the desired move in the price of oil most members wished to see.

These pleads fell on deaf ears as Riyadh was firm on its decision, the first signs of the fractious relationship showing cracks within the organisation. At the time I had said Saudi Arabia was risking the economic prosperity of its member countries in favour of its own agenda and the result would likely cause involuntary political uncertainty due to headwinds faced by lower oil prices that only served to exacerbate a difficult economic burden on their citizens.

As developments have taken shape since that failed meeting in December, the turmoil has grabbed hold of both countries and as predicted, political instability has given rise to heightened risk by investors who put fate in their chances in those countries. This has left a considerable amount of acrimony in the aftermath of crippled economies whether or not both these nations try to veil their ill-feelings to hide signs of disunity.

Vulnerability of alliances is what will press Riyadh to relook at its diplomatic position over the last year of dealing with OPEC members with this case being the perfect example of how strong bonds may turn into weak reliances if every nation's expectations aren't met leaving the door open to possible promises being made by other ambitious members, namely Iran.

Petro-Diplomacy in Vienna: Can #SaudiArabia Mend #Opec Divisions? https://t.co/6Ca2fn0R9p via @business #oil #OOTT

— Javier Blas (@JavierBlas2) June 2, 2016

Which brings me to the next contentious issue inside OPEC right now and that's the rife between Saudi Arabia and Iran with the latter refusing to participate in an agreement that would see oil output frozen for a set period of time. The refusal comes after the Arab nation was unshackled from trade sanctions that prevented it with selling it's most popular product, oil, to other countries in Europe and the US, the bulk of its customers.

Being unable to lift output during times of sanction, Iran feels its done enough for OPEC to warrant its exclusion from the deal which it sees as a hindrance to its economic recovery rather than a benefit. Notwithstanding this argument Riyadh has come out strongly against its non-compliance saying it will not agree to any plans unless Tehran is seated at the same table and reciprocates causing immense tension between the two.

But once again, Saudi Arabia fails to take into account the economic misgivings of other member nations and instead places its own prosperity in front of everyone else. The trend of continually overlooking economic dilemma's without any sympathy is starting to paint them as dictatorial in their rule of the collusive agreement which is bound to come under some sort of resistance now or in the future.

It's effort to smooth over ties at the current meeting won't yield much more than a mere acknowledgement of a gesture but it certainly doesn't undo the calamitous outlook some of its members face because of its arrogance. Recent comments made by the deputy crown prince Mohammed Bin Salman Al Saud would certainly speak to the contrary when looking for genuineness of extending a hand of goodwill when you weigh up his threats to drastically increase Saudi's oil production to undercut Iran's plans to expand its own production from record lows.

The timing of the move should be scrutinised as Riyadh is simply trying to cover up its failings by projecting a victory of its belief by showcasing the mammoth rally experienced in the oil price which is far from the doings of its actions.

Saudi Arabia should be cautious in its approach to how it intends of resolving disputes amongst members especially those who take issue with itself. All it needs to be reminded of this is the deputy crown prince's plans to make the Kingdom less reliant on black gold and diversified in other areas of investment. The retaliatory backlash it could face from within its own OPEC membership could derail those plans altogether and place it in its own dilemma, a fate I can't think it envisions itself in.

Saudi Arabian Prince Mohammed bin Salman reshuffles cabinet to shore up power

It was only last week that an Iranian deputy military commander warned off the US and its allies over an attacks on its kingdom saying it was prepared to close the Strait of Hormuz, a crucial gateway for oil produced in the Middle East to leave the region and delivered to the rest of the world, if it found their actions threatening in any way. These comments clearly sent a message of defiance to the West who've recently unshackled Tehran from years of sanctions.

I wrote an article last week Thursday expressing my opinion that Iran was harming the image of its nation in the international community by playing the contemptuous card in the actions and comments it made so early into its readmission. When the mention of "US and its allies" reached the ears of Riyadh, many knew that would be some sort of retaliation from the Arab Kingdom.

When asked last month what Saudi Arabia would do if Iran was unprepared to agree to freeze oil production along with other OPEC members, Deputy Crown Prince Mohammed bin Salman stated that Saudi was ready and able to increase their production at any moment. He also went on to say that Riyadh had the capability of increasing its oil producing capacity to 20 million barrels a day if the kingdom decided on investing further in its oil sector.

These comments came as a threat to Tehran who subsequently didn't arrive at the oil summit in Doha, making up a well of excuses for its non-attendances but as it boils down we see this was a tactic by them to test Saudi's willingness to go forward with their own threats. The remarks made by an Iranian deputy military commander were simply a means to stir the provocation even more to measure the level of tolerance.

It didn't take long for Saudi Arabia to respond with the latest shake up causing analysts to stop and reassess the influence of the Deputy Crown Prince Mohammed bin Salman's power in matters relating to the economy of the kingdom.

Salman has fired prolific oil minister Ali al-Naimi who had served in his position for 21 years and replacing him with Aramco chairman Khalid al-Falih, showing his desire to take more control over the situation which is developing between themselves and Iran. The influential discretion afforded to al-Naimi in terms of his powers to formulate oil policy in Saudi Arabia and OPEC helped shore away the kingdoms conflict with other members in the Middle Eastern region namely Iraq and Iran.

Power and a 'brutal' battle against Iran: What the Saudi reshuffle REALLY means https://t.co/isPK0GFYcW

— CNBC (@CNBC) May 9, 2016

However Salman's sweeping changes has shifted the perspective view on Saudi Arabia with many believing the 30 year old's aggressive approach could indicate a heightened and tense geopolitical situation building up that could possibly interrupt the supply of oil.

The Saudi prince has been tasked with transitioning his family's kingdom from an oil dependent nation into a more diverse economy reaping its benefits towards a greater number of sector, an immediate acknowledgement that the risk presented in the current oil market doesn't mitigate itself over the long term and the onset of alternative sources of energy provides a real threat to the industry.

Although Salman might be ambitious in his desires, the success of his plan will be the function of how well he is able to diverse the kingdom's reliance on oil into other sectors but at the same time retain control over OPEC so as to have a larger weighting on the direction of oil prices and thus more certainty during its transitive period.

Iran stands in the way of this presenting the prince with a problematic situation to deal with; if he allows Tehran to continue producing, the benefits that could be rendered from a unified cooperation would take longer because the deficits would consistently be cancelled out by the added production from Iran. One needs reminding that nothing stops Iran from going over and above its targeted production in its own ambitions to wrestle control away from Saudi Arabia, an outcome that could be disastrous for Riyadh as they'd no longer have discretion over direction.

Salman's thinking would be on par with a tit-for-tat playground attitude in the sense that if the Saudi kingdom can't get what it wants then no one will get anything, even if it means taking on financial strain in the process.

The prince knows that Iran is desperate to get back on track which is indicative from the enormous capital spend it's laid out in the area of air and rail transportation. This certainly doesn't stop here but the expansion of this program would require a healthy and stable climate in the oil market to emerge which is seeming unlikely given these turns of events.

This would be an incredible risk to take on after the kingdom admittedly suffered defeat at the hands of US shale gas producers by initiating the proposal to freeze production. There intention the last time round was to secure market share by squeezing out these new competitive players which hasn't worked.

I look at things this way, either Saudi Arabia is going to stamp its authority on the dominance oil or its going to end very badly for the Arab Kingdom. With the type of economic developments evolving in the world, I wouldn't think it would be appropriate to be taking on such a risk but only time will tell.