Yves here. This article describes how an OPEC+ commitment to raise output is a big headfake. It also serves to remind readers of an important point: the rupture between Saudi Arabia and the US got serious when US ramped up shale production, and continued to produce shale gas at high levels and at losses in the face of Saudi price cuts. A short term cooling of hostilities with Iran didn’t help.
By Simon Watkins, a former senior FX trader and salesman, financial journalist, and best-selling author. He was Head of Forex Institutional Sales and Trading for Credit Lyonnais, and later Director of Forex at Bank of Montreal. He was then Head of Weekly Publications and Chief Writer for Business Monitor International, Head of Fuel Oil Products for Platts, and Global Managing Editor of Research for Renaissance Capital in Moscow. He has written extensively on oil and gas, Forex, equities, bonds, economics and geopolitics for many leading publications, and has worked as a geopolitical risk consultant for a number of major hedge funds in London, Moscow, and Dubai. Originally published at OilPrice
Russian Foreign Minister, Sergei Lavrov, and his Saudi counterpart, Prince Faisal bin Farhan, met at length last week in Riyadh after which they released statements highlighting: “The level of cooperation in the OPEC+ format.” The two ministers underlined the: “Stabilising effect that tight coordination between Russia and Saudi Arabia in this strategically-important area has on the global hydrocarbon market.”
Shortly afterward, the OPEC+ alliance, comprising all the OPEC member states plus most notably Russia, announced a theoretical increase in crude oil production – of 648,000 barrels per day (bpd) in July and August, instead of by 432,000 bpd as previously agreed. In practice, as it also includes Russian exports that are already banned by the U.S. and are being banned in the E.U., the increase is meaningless. Subsequent Saudi assurances that any deficit in Russia’s output caused by the ban will be met by other OPEC states is similarly meaningless in practical terms, given enduring question marks over genuine output capabilities.
Any residual notion that Saudi Arabia might be trying to alleviate the economic problems of many countries resulting from high oil prices was dispelled over the weekend, as the Kingdom raised its official selling price for its flagship Arab Light crude to Asia to a US$6.50 per barrel (pb) premium for July to the average of the Oman and Dubai benchmarks, up from a premium of US$4.40 pb in June. The net effect of OPEC+’s production increase, therefore, will be zero, which Saudi Arabia, Russia, and all other OPEC members, know perfectly well. So, why is Saudi, for so long a staunch ally of the U.S. after the landmark relationship deal made in 1945, now so resolutely sticking with Washington’s long-time nemesis, Russia, even with the invasion of Ukraine still in full swing?
The core of the answer lies in the immediate aftermath of the 2014-2016 Oil Price War launched by Saudi Arabia with the specific intention of destroying – or at least disabling for as long a period as possible – the then-nascent U.S. shale oil sector. In 2014, the Saudis had correctly identified this sector as the biggest threat to its finances and political power – both of which were, and still are – founded exclusively on its oil resources. In addition, but incorrectly at that point, the Saudis believed that the U.S. intended to cease, or at least significantly scale back, its on-the-ground support for Saudi Arabia in the region as Washington’s principal bulwark there against the increasing influence of Iran, Russia, and China. These fears in Riyadh were being stoked at that time by the ongoing talks of a ‘nuclear deal’ between the major powers, led by the U.S. itself, and Iran – Saudi Arabia’s longstanding nemesis. These talks did indeed result less than a year later in the Joint Comprehensive Plan of Action (JCPOA) deal that effectively brought Iran back into the mainstream of global political interplay.
Due mainly to the remarkable, and unexpected, ability of much of the U.S.’s shale oil companies to survive with oil prices that had been pushed extremely low through OPEC overproduction, the 2014-2016 Oil Price War resulted in devastation for the economy of Saudi Arabia and for its brother states in OPEC. An additional negative result for Saudi Arabia was that it had lost its credibility as the de facto leader of OPEC and that OPEC had lost its credibility as the indomitable force in global oil markets. This meant that OPEC’s pronouncements on future oil supply and demand levels – and therefore, on pricing – had lost much of their potency to move markets in and of themselves and that their joint production deals were diminished in effectiveness.
In the interim, many of the positive rationales on both sides of the core 1945 agreement between the U.S. and Saudi Arabia had disappeared. The U.S. did not trust Saudi Arabia anymore not to go after its shale oil sector. It also did not trust Saudi Arabia to try to keep oil prices within the US$35-75 per barrel (pb) of Brent price band that was ideal for Washington: the first number being the floor at which many U.S. shale producers could at least breakeven, if not make a slight profit, and the second number being the cap after which extremely serious negative economic and political threats begin to emerge.
For the U.S. economy, historical precedent highlights that every US$10 pb change in the crude oil price results in a 25-30 cent change in the price of a gallon of gasoline, and for every one cent that the U.S.’s average price of gasoline increases, more than US$1 billion per year in discretionary additional consumer spending is lost. Politically, as shown in my new book on the global oil markets, since World War I, the sitting U.S. president has won re-election only once out of seven times if the U.S. economy was in recession within two years of an upcoming election. President Biden – or whoever the Democratic candidate may be – will face another presidential election in 2024, but even before that, he faces critical mid-term elections in November 2022, when his Democrats could lose their narrow majority in the House of Representatives.
For these reasons, the U.S.’s view had changed into the very one that Saudi Arabia had long feared. This was that Washington intended to cease, or at least significantly scale back, its on-the-ground support for Saudi Arabia in the region once it could ramp up its own oil production so that it did not need Saudi oil anymore, and once it had made other potentially Iran-countering alliances in the Middle East. This process in fact began with the ‘relationship normalisation’ deals drive begun in 2020.
For Saudi Arabia in the immediate aftermath of the 2014-2016 Oil Price War, there appeared little choice but to stand by and watch as the U.S. inexorably increased its own shale oil and shale gas supplies and made new alliances in the Middle East, whilst all the while gradually reducing all elements of its support for the Kingdom. It is little wonder, then, that Saudi Arabia at the end of the 2014-2016 Oil Price War, grasped on to Russia’s offer of help. The Kremlin at that point was fully aware of the enormous economic and geopolitical possibilities that were available to it by becoming a core participant in the crude oil supply/demand/pricing nexus, so agreed to support the next OPEC production cut deal in what was to be called from then-on ‘OPEC+’.
This ‘unholy alliance’, as more than one source in Washington characterised it to OilPrice.com at the time, was of deep concern to the U.S., and served only to compound the growing feelings of distrust towards Saudi Arabia. These feelings were exacerbated when the Kingdom launched yet another oil price war in 2020 with the same intention as 2014-2016 of hurting the U.S.’s shale oil and shale gas sectors, which Washington perceived as a hostile act. These negative feelings have subsequently worsened due to several factors, with a key one being Saudi Arabia’s unwillingness or inability to do anything meaningful to bring down still-high oil prices.
Riyadh for its part had ceased to regard the U.S. as a true friend in the world stage by 2016 and those in power now in Saudi Arabia, the al-Saud royal family, are also fully aware that the 1945 agreement – which crucially for them includes the U.S. supporting the family in its leadership position in the country – is no longer in play on Washington’s side. This can be inferred from Crown Prince Mohammed bin Salman’s refusal to even take a telephone call from President Joe Biden on the subject of enduring high oil prices.
It can be argued that the only reason why Saudi Arabia has not yet gone even further in terms of political alliance with Russia than continuing to stand with it in OPEC+, is that it does not yet feel supported enough from the China-Russia axis to want to incur the full wrath of the U.S. The resuscitation by Washington of the ‘No Oil Producing or Exporting Cartels’ (NOPEC) bill is the surest sign yet that Washington has finally run out of patience with Riyadh. It has been – rightly – construed by Saudi Arabia as a warning shot to more profound further actions if it does move further directly and overtly into the China-Russia sphere of influence. However, Saudi Arabia’s plethora of deals with Russia since 2016, and with China too – plus its re-energising of the Gulf Cooperation Council within an apparently ‘Pan Arabist’ context – seem to portend an even clearer and decisive shift of Saudi Arabia and its own allies, including OPEC and OPEC+, away from the U.S. and towards China-Russia going forward.
There is a very simple answer for the US – replace Saudi with Venezuela. It requires a certain amount of statesmanship that may be currently missing in DC. A persistent economic crisis due to high energy prices might be just the medicine that would help focus the mind of our elected representatives.
The oil sector does not exactly work this way. Saudis are light sweet crude, good for car and aviation fuel; Venezuela, if memory serves, is, like Mexico, a heavier and more sour (higher sulfur) mix, which is better for diesel and such. And each kind gets its own set of refineries that can process it.
The point is, if you’d spent decades streamlining certain parts of your supply lines and refining chains to work off Saudi crude, you cannot just snap your fingers and swap in Venezuela. If you look at US import export data (e.g. https://www.eia.gov/dnav/pet/pet_move_wkly_dc_NUS-Z00_mbblpd_w.htm), you can see that the US specifically is net importing oil and net exporting product, so it’s the whole refining chain you have to think about. And the biggest net export excluding NGLs seems to be fuel oil, so I would not be surprised if US heavy crude refining capacity is already tight.
Thank you and well said, SF.
A decade or so ago, the Mauritian government contracted Mangalore Trading to import oil. The oil was not what is usually fed into the local power system and caused that to fail.
This implies that EU efforts to diversify from Russian oil will be both difficult and time (and expert labour) consuming. Just another nail in the European coffin, then, while the US continues to buy Russian oil. How the Europeans can be so terminally stupid should be one of the most urgent fields of scientific enquiry – great insights to be gained.
Apart from the fact that it’s the wrong type of crude, who says Venezuela would pick up the phone to Biden, or Iran for that matter. Anycase, the Americans sanctioned them, now they can try un- sanctioning them if Congress would allow it or ‘go green’ as Biden said.
Simple, and wrong. In what fantasy world is VZ obliged to make a deal with an agreement-incapable empire? In what children’s story is the US entitled to a deal simply because it wants one? VZ would be better off standing at the shore and watching the USG flail and drown, weighted by stolen gold.
Thank you, Yves.
This post is timely.
My father spent a quarter of a century as a doctor to the royal family and professor of public health and toxicology in KSA. We are not surprised by what’s going on. The Al Saud family may be bad, but they are not mad. They have been around a lot longer than dynasties like the Bush and Clinton gangs, have an institutional memory, take a long term view (although MBS sometimes doesn’t) and won’t hesitate to move on from Uncle Sam.
Yesterday evening I learnt from a friend / former colleague / ex UK financial services regulator / current UAE financial services regulator of the influx of Russian and Ukrainian turned Israeli money into Dubai and, to a lesser extent, Abu Dhabi, how it’s easier to count the number of Russian and Ukrainian oligarchs who are not Israeli nationals rather than the other way round, and how the UAE authorities see the opportunity to loosen links with the west, build up links with the likes of China and Russia, and take business from legacy financial centres, especially as the west decides to sanction anything not to its liking.
My friend is working on the authorisation of investment firms, so seeing the applications and flows. His report was corroborated by a colleague who has a relative at the central bank.
Many Gulf finance officials and bank leaderships are from the UK and its dominions. The bank staff are often hydrocarbons specialists. Some have worked in and / or with Russia.
BTW I am invited to an event at BMO later this month, UK train strike permitting, and will relay any tidbits.
This is why I like sites like NC. I would like to thank you and others like you who provide “how the sausage is being made” insights that are very enlightening and valuable. You just don’t get info like this from other web sites. Again, thanks!
I hadn’t realized until recently that Israel is something of a quasi-ally of the Russians. Maybe not in Molotov–Ribbentrop Pact territory, but adjacent. You can see this in how Israel is handling the Ukraine crisis. I am not at all a supporter of Russia’s attack on the Ukraine. But overall FWIW, I think the Israeli attitude is more mature than ours with regards to Russia.
A reason would be that so many Russians emigrated to Israel after the USSR collapsed. ‘Between 1989 and 2006, about 1.6 million Soviet Jews and their non-Jewish relatives and spouses, as defined by the Law of Return, emigrated from the former Soviet Union.’ And ‘As of 2022, Russian-speakers number around 1,300,000 people, or 15% of the Israeli population. This number, however, also includes immigrants from the Soviet Union and post-Soviet states other than Russia proper. Most Russians who immigrate to Israel are of mixed ethnic origin.’
Anyone who wanted out of the Soviet Union needed just a bit of proof that they were Jewish. A lot of folks with 1/4 Jewish ethnicity or less used the ” Records were destroyed in WWII” ploy and it worked. The main criteria for immigration was “Do you dislike Moslems as much as we do?” So, according to a friend in Haifa, the fastest growing religion there is Eastern Orthodox Christianity.
As for Saudi Arabia, Oman, Russia, Israel and the US…. to quote from those who don’t pretent to be children: De Gaulle “France has no friends, only interests” and Kissinger “America has no permanent friends or enemies, only interests”. So the Russian-Jewish money flows to Oman and the New York Times pretends not to notice.
I have friends in the shale oil business; they’re doing quite well, thank you.
You are confusing Kissinger with Palmerston. Easily done, they were born in the same year.
“Therefore I say that it is a narrow policy to suppose that this country or that is to be marked out as the eternal ally or the perpetual enemy of England. We have no eternal allies, and we have no perpetual enemies. Our interests are eternal and perpetual, and those interests it is our duty to follow.”
Another would be that the Russians really did beat the **** out of the Nazis and are still serious about it.
The tectonic plates are not just shifting under the feet of US/Western hegemony – the rate at which they’re shifting is accelerating as well …
Thanks for these insights!
Thank you, Chris.
Who knows how things will end, but we can be sure that (many in) the west does not appreciate what is happening.
Fascinating story, Colonel. The expression ‘know where the bodies are buried’ is figurative in most cases but I suspect your dad really did know. BTW, a neighbor who’s a cardio-thoracic surgeon at Yale went to the Gulf as a high priced consultant for a few weeks and among other things he said was that the top royals in all the GCC countries have living ‘organ donors’ on call, tissue-type matched people from poor Muslim countries who know the game they’re playing but are so poor that they take the gig.
Was your father there during the reign of Saud (eldest sun of Ibn Saud), who was such a drunk that his brothers eventually deposed him. I read that when he went on a state visit you could here the rattling of the bottles of alcohol packed in his aides’ bags.
The bigger picture here of course is that the Gulf States have slowly been moving away from their dependence/alliance with the US and to a lesser extent Europe. I doubt they will go into a full alliance with Russia or China, but will gradually try to become another pole in a multipolar world.
The nasty autocracies of the Gulf will I think emerge as the big winners from Ukraine. Not just in terms of making vast amounts from high oil/gas prices, but the UAE and Qatar will benefit too from hot money fleeing the US/UK.
Oh my yes. As the west has shown that they are willing to confiscate any country’s financial holdings on a whim, I can see that a lot of investors are now nervous about their holdings. The UK stealing Venezuela’s gold was the canary in the coal mine but the seizure of Russia’s sovereign wealth is something that cannot be ignored. Maybe the calculation is to move those investments to countries that are backed by actual commodities. Russia may be a no-no at the moment but the Gulf States are certainly backed by commodities. I wonder if both the City of London and Frankfurt may start hemorrhaging money to the Gulf States soon then.
Thank you, Rev.
You may rest assured of that.
It won’t be just London and Frankfurt*. After Switzerland and Singapore took sides, Dubai and even Mauritius will welcome that money.
*The favourite to be the next CEO of Deutsche Bank has long feared this and supported the bank’s scaling back of activity in the US and for Germany to be less Atlanticist.
There are cynics like me in the City who reckon the UK should take advantage and cosy up to the emerging multipolar centres and leave the EU and US behind.
It didn’t start with Venezuela. During WWI and WWII all the private corporate property of Germans were taken by the allies. The money trail is… interesting. A number of US corporations and personal fortunes- not to mention a huge Presidential slush fund that lasted until the Chuch Committee/Watergate era stemmed from that episode.
The Germans are not stupid; that’s why so many German petrochemical and pharmacutical companies are registered in Switzerland.
Thank you and well said, Dave.
Ask the Bush family and consult their private archives.
This is also how the WEF’s Klaus Schwab and Swiss nationalist leader Christoph Blocher came around, children of Nazis.
So, if we weren’t so pig-headed about being unceremoniously kicked out of Iran back in the 70s, now would be the perfect time to make nice.
I wonder how long it will be before the US stages a coup or some other false flag operation in Saudi Arabia to justify installing a puppet government or to even invade. The US history is replete with such operations. As long as we could control the oil fields and prevent their being damaged or destroyed I don’t think it will be very long before something like this happens. We did it in 1953 in Iran over oil.
Thank you, Jack.
Please see my comment above.
KSA is artificial, something the Al Saud family (from the central Najd region) is well aware of. It fears Hashemite loyalists in the Hejaz, Shiites in eastern province (which is where the giant Ghawar oil field sits) and in Asir, Yemeni irredentists in Hadramawt (homeland of the Bin Ladins and 15 of the 19 9/11 hijackers) and al Rashid pretenders in the Djebel Shammar border area (with Iraq). There are al Rashid rebels in southern Iraq. The west won’t be short of proxies.
ironically, from a practical matter, the best out-group to ally with in order to oust the House of Saud are the Saudi Shia.
Yves – in the intro you wrote ” the rupture between Saudi Arabia and the US got serious when US ramped up shale production, and continued to produce shale gas at high levels and at losses in the face of Saudi price cuts.”
The Saudis don’t compete with US shale gas, and could care less about it. They care a lot about the oil the shalers produce, and in 2014 started a price war in an (unsuccessful) attempt to drive them all out of business.
Good post, but that should be fixed.