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.

Saudi Arabia showing signs of economic distress with low oil prices

The instability of oil prices in the last two years has meant bad times for many countries, especially those who are reliant on OPEC to interfere with the supply dynamics, suffering grave economic consequences as a result of lower but much needed revenue streams.

Chief culprit in the deliberate cascade of surplus oil finding its way into a demand-waning market has been Saudi Arabia whose steadfast conviction in budging out fresh competition cannot be discounted from the levels its gone to in ensuring difficulty for the newcomers entering a state of profitability.

However this hasn't come without cost as the world's largest exporter of oil has used its de facto position as leader of OPEC to influence market dynamics most often to the detriment of all parties involved in the collusive agreement with the economic pinch now hurting Saudi's fiscal budgetary plans that lie in jeopardy.    

As austerity bites in #SaudiArabia, a testing time for its prince https://t.co/M4e0hxNYTm @gccarey1 @DeemaAlmashabi pic.twitter.com/QYWEr9BRB8

— Javier Blas (@JavierBlas2) August 17, 2016

Probably the biggest reason for the US having a propensity to seek out alternative forms of energy stemmed directly from the fluctuant state of affairs in most OPEC countries that's dictated supply to the rest of the world meaning less control by external forces.

In turn Saudi Arabia and many of its counterparts have used the abundance of this scarce commodity as a strategic resource used to distribute prosperity to its citizens instead of allowing the free market to concentrate the wealth in the hands of a few greedy individuals. As commendable as this societal approach might sound it requires a domineering government administration which on most occasions involves a suppression of its citizens instead of their liberation.

Such has been the case in the kingdom of Saudi Arabia where its citizens have been fed with state benefits for many a decade in exchange for implicit support for its monarch. But this understanding is coming under threat as the war on oil price heats up and the longevity of extensive means of action in place extended further into the future than intended.

The flummoxed leaders of Saudi Arabia hadn't bargained for the length of time needed to eliminate competition, a goal that's hardly given any relief to the flourishing inventory of oil sitting in storage. Just last week I wrote a piece detailing Riyadh's efforts to fight back at US shale gas producers and went on to say that its plan had lost the definition of being a short term dilemma and had begun moving into the realms of longer term risks disturbing the forced order.  

Prince Mohammed bin Salman, the youthful deputy crown prince and second in line to the throne has been vocal about his radical plan to shape Saudi Arabia from its over reliance on oil as a main component in its economy to a more diversified spread of sectors as a bold change needed to secure its future although his arrogance and lack of diplomacy regarding leniency to fellow OPEC members in recovering economically from a global trade hiatus (the member being Iran) hasn't won him over many friends.

Backed into a corner, Salman needs to tread the waters carefully so as to not upset the kingdom's standing with its people but at the same time wastefully spend its time fighting a price battle that will presumably end up with the free market gaining some sort of control over oil supplies. If he isn't successful in convincing Saudis of his grand plan the country could very well see unrest descend into its streets and the power of the monarch stripped from its existence.

Is Saudi Arabia up to its old tricks again?

When the thought of oil returning back into bear territory became too good to be true, the Russian Energy minister Alexander Novak swooped in to rescue deflated expectations by coyly suggesting that his nations were open to negotiations if fresh talks were to begin regarding the issue of oil production freezes but went on to say that elevated prices would likely provide producers with relief rather than resolve at this current time.

Prices immediately rose on the news with many speculating that OPEC might use an upcoming informal meeting to be held in September to thrash out the possibilities of it happening with intentions of finding a better approach  dealing with the matter than they had done previously when not all members, namely Iran, could be drawn to agreeing to conditions set down.

Russia sees no grounds for new talks on oil output freeze yet https://t.co/YwRoCVyiY9 pic.twitter.com/beswYepPAF

— Reuters Top News (@Reuters) August 8, 2016

But the prospects of this occurring in the not so distant future fell faster than a stone in water after de facto OPEC leader Saudi Arabia announced with much pleasure it had pumped out a record amount of oil for which it says was intended to cater for an increase in summer demand in the Middle East.

Riyadh may think this limp excuse may be useful in misleading the oil market relating to a downturn in prices where concerns have raged over demand being outstripped by abundant supply by falsely believing oil prices have bottomed, it does more to show the factionalism that cuts deep within the organisation following a series of disagreements as to the course of action needed to fight new competition.

This kind of statement that's hurriedly found its way into the news promptly after Alexander Novak comments of a possible freeze indicates Saudi Arabia's true feelings towards the issue. If it were to be brought up again it'll refuse to acknowledge a problem as it had done prior to its involvement that happened only because the Arab kingdom's finance's had suffered drastically as a result of the slump.

It's clear that Saudi Arabia's plan to rid the oil market of US shale gas producers is not one it sees itself warding off in the short term but rather a much  bigger threat that necessitates the argument for continuous attacks aimed reducing the profitability of their ventures, the most profound strategy being a deliberate effort to flood the market with cheap oil.

The news shouldn't be seen on the face value of it but rather a signal that tensions are rising amongst OPEC members again and possibly an indication that we'll see weak oil prices going into the end of the year.

Saudi Arabia Said to Pump Record Oil Output to Meet Summer Usage https://t.co/qr3U0NBmes

— Livesquawk (@Livesquawk) August 10, 2016

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.  

Saudi Arabia stands by its tough talk with no involvement from Iran

Oil producers were unable to agree on a deal in Doha that could've seen the production of the commodity frozen for a set period in an effort to lift prices that have traded near 12 year lows. The oil summit was called after Saudi Arabia along with Russia, Qatar and Venezuela proposed to freeze their production on condition that other producers including that of Non-Opec nations, did the same. This prerequisite came from the insistence of Saudi Arabia who's been at loggerheads with neighbours Iran who refuse to follow such a plan.

In an interview with Bloomberg last week, deputy crown prince of Saudi Arabia, Mohammed bin Salman Al Saud stated that the country wasn't willing to strike a deal without the involvement of Iran and should a deal not be agreed too the oil rich kingdom could immediately raise production to over 11.5 million barrels per day which would add even MORE supply to an oversupplied market.

As much spin as Tehran tries to put on the reasoning for their absence no doubt has been left that the real intention behind the nonattendance was to test Riyadh's threats of turning its back on a deal should their conditions not be met which is now clearly known.

But as much as Saudi has stood by what its said it does also paint a grim scenario for the price of Black Gold should they move ahead with plans to expand production aimed at crippling other producers and stamping their authority on the dominance of oil supply. Mohammed bin Salman was in an retortive mood when he hinted that his nation could increase production too as much as 20 million barrels per day if it invested considerable capital into the oil industry.

Oil slips on failed Doha deal https://t.co/5W9iV5c1ir pic.twitter.com/xmOxvgSJot

— RT (@RT_com) April 18, 2016

One thing is for certain and that is Saudi Arabia may have become alarmed by the emerging trend of bleeding foreign reserves to cushion the blow from lower oil prices however their stash hasn't been so badly affected that it causes those in charge to lie awake at night just thinking about it.

Iran is at a distinct disadvantage here while only having just been released from the shackles of sanctions from the international community. They'd need to see a higher oil price to benefit properly from the sale of their produce to be certain of repairing the economic damage caused through the years of non-inclusion in world trade.

But Saudi Arabia could suffer much more over the long term by making their allies believe that their interest in OPEC lies not in the common good of all members but rather on their own self-centred needs. In protecting their market share, Riyadh is showing the world that it's not willing to compromise its own dominance while asking others to do so with dire consequences attached to the lack of following instructions.

In the age of globalisation, world trade has grown stronger and ties between nation don't only depend on economic coordination as had been the case for many years. Money talks and so it walks when the deal no longer makes sense for both parties. Saudi's bullyboy tactics might stab at the short term benefits that could've been captured if Iran's detachment from the deal was overlook but the longer term implication hold a shaky ground for those who now see Saudi's dictatorial rule over OPEC as oppressive to economic prosperity.    

This chart shows that #Opec’s days as econ force are over. Group is unable to reverse current slump in crude prices. pic.twitter.com/9iDCYuU82d

— Holger Zschaepitz (@Schuldensuehner) April 18, 2016

The 3 players that matter the most in Doha oil talks

With three days left to go to the start of the much anticipated oil summit set to take place between OPEC and Non-OPEC producing nations held in Doha, most market participants remain skeptical that a long term positive outcome can be found when leaders sit down to discuss a possible oil production freeze.

I've been following the story since the middle of last year and have stated a number of times that a resolution to this matter will only be found when the biggest producers are the ones at the tail end of the economic damage which has slowly materialised. Up until a few months ago Saudi Arabia had remained steadfast in its decision to rid the market of alternative producers in the US by flooding the market with barrels of oil.

This initially worked with US shale producers feeling the pinch and responding almost immediately with closures of wells that couldn't break even as well as preparing for a financial storm that had been brewing over the levels of debt created in starting up these new ventures. However it didn't stop these producers from exploiting the richest wells with quantity aplenty to help them extend their stay in the oil market a little while longer and become a frustration to the Saudi's.

Added to this a new problem was slowly starting to emerge within the context of the entire world economy where the growth needed to stoke the coals of  the economic engine were found wanting with both the US and China letting up far more than would be necessary to nudge things forward.

Double whammy...

Having heard cries of help from other minor producers in OPEC, Saudi merely let those calls fall on deaf ears as they proceeded on but its placed them in a vulnerable position within the oil producing community. Saudi's efforts to curb its ill gotten plans that have backfired and put not only their well-being at jeopardy but the entire membership of OPEC, leaving them open to harsh reactions from those it failed to listen to.

This can't be a good footing to stand on when negotiating the stability of oil prices let alone a steady and consistent relationship amongst its peers in OPEC where co-operation from each party is an absolute necessity which is what we find with fellow member Iran.      

When #OPEC & non-OPEC oil meet this weekend, it will be one of the most closely watched #oilsummit in yrs. https://t.co/oAhA3Z0nJu #giforum

— Gulf Intelligence (@gulf_intel) April 11, 2016

Iran's readmission into the oil market has dampened the outlook for the supposed Black Gold as the inventory of barrels stockpiled in Tehran is bound to be sold off to help aid an economy that's been economically isolated for a number of years.

However the relationship between Tehran and Riyadh hasn't been favourable at the best of times and the recent announcement by Saudi proposing a production freeze was met with a cold tone of defiance when Iran's oil minister was quizzed whether his country would be participating in such agreement. Tehran  had explicitly stated its objection to such a proposal before Saudi gave details of a possible way of halting the oil glut.

Sensing that Tehran could drag its heels, Saudi decided to find a better suited candidate that would give an extra notch of credibility to its plans to slow down the rate of oil production worldwide. Russia currently produces 10.9 million barrels per day marginally outstripping that of Saudi Arabia who is currently on 10.6 million bpd. Merging a plan together with both these players does add a degree of a no nonsense approach to the proposal but does it have the staying power to convince others?

Russia tactically got involved as it sees itself becoming a more prominent player in the oil market, possibly suggesting why the annexation of Crimea proved to be a hasty decision taken by Russian President Vladimir Putin. It's also got in on an oil deal with China that OPEC had hoped would've been swung its way but was beaten to the chase having devoting its attention to the oil price wars with the US.

But we should not forget that Russia's own economy has been crippled by the sanctions imposed on it from the West following the annexation of Crimea. Oil plays a significant role in providing much needed income in rebuilding the Russian economy and if Putin's ambitions are anything to go by don't expect anything less than astounding.

#Iran #oil production rises to fresh 4-year high of 3.3m b/d (up 300kbd from January) as nuclear sanctions lifted pic.twitter.com/kfBpXaGfZ3

— Javier Blas (@JavierBlas2) April 14, 2016

Since Saudi Arabia is seen as the leader of OPEC and possibly oil producers, their choice in strategy to freeze production as opposed to cut production was taken because they feels vulnerable of losing this status if it fails to play their cards properly which could see a hugely influential West losing its grip on oil supply since Washington and Riyadh hold close ties that sees a cordial understanding in keeping oil prices and production steady.

It's not a hidden secret that Iran has suffered from the economic sanctions imposed on it by the US and its dissatisfaction at the way Saudi Arabia has handled threats of new entrants to the oil market. Iran has capacity capable of meeting that of Saudi which would almost diminish the relevance of the latter should they chose to cut back production.

Russia on the other hand sees its ambition to play a more influential role on world politics as a priority with oil being strategic to this goal. It wouldn't miss an opportunity to circle a "wounded animal" so as to say when they see the pressure Saudi has come under in the waking months. Putin is too much of a political manoeuvrist to pass up such a chance to take power away from a controlling nation.

It's because of the above scenarios that I don't see the likelihood of a oil production freeze having an major impact on prices over the long term. The market remains critical and with profit margins being squeezed and debt hanging over the heads of management any significant jump in the price would yield an immediate flurry of selling from producers, pushing back the price from whence it came.