The Anti-Iran Alliance Is Cracking

Rosneft’s Sanctions Hedge Play

One of the key underpinnings of US global economic power is the use of the US dollar for global trade transactions, but sanctions make that a far less attractive setup for other powers. It is no coincidence then that we are starting to see a de-dollarization drive from a variety of players. After much talk about Russia switching to the Euro, Russian oil giant Rosneft is taking the first concrete step toward this reality: Traders have told Reuters that Rosneft has informed them that future tender contracts for oil products will be in euros, not dollars - as soon as Q4 of this year. It’s a hedge against future US sanctions, and a hedge against, well, hegemony. For now, consider this more significant in terms of a hedge against sanctions rather than the dollar’s hegemony. In reality, the dollar will be very difficult to dethrone.

The Gulf Anti-Iran Alliance Is Cracking

The back channels between the UAE and Saudi Arabia are many and deep, and while the Saudis might not have blinked at first when UAE-backed separatists seized Yemen’s southern port of Aden from the internationally recognized Hadi government, this was not done without some sort of back-channel discussion. The UAE wants out of the Yemen conflict, which is costing it, on a monthly basis, billions of dollars. The biggest question for investors right now is whether these Gulf relations are even sustainable, or whether we’re about to see a major shift in Mideast strategies.

Last week, we discussed the UAE-backed separatist takeover of Aden, and since then, it has become clear that the UAE is trying to split Yemen into north and south and there are rumors that it has even agreed to a ceasefire with the Iranian-backed Houthis. This is a highly significant development considering that the UAE continues to view Iran as a threat. Threat or no, the fact is that Gulf relations are cracking, and Iran isn’t necessarily the odd man out here: It’s biggest support right now is Qatar; but Oman is also moving closer and Kuwait seems to be less interested in its previous alliances. That leaves only Saudi Arabia and its stooge, Bahrain, and the UAE as staunch anti-Iranian policymakers. With the UAE backing out of Yemen, that further diminishes the anti-Iran alliance.

By withdrawing from Yemen and setting up a play to separate south and north, the UAE isn’t trying to say that it’s changed its mind on Iran. It’s a pragmatic play that says that this war isn’t just too costly - it’s entirely unwinnable. The Saudis know this, but they can’t simply withdraw because it would be a reputational hit that MBS could not afford.

That there is a growing rift is also evident in another development that has been kept quiet over the course of the past few weeks: The Saudis have been bombing airfields controlled by the very same separatists that the UAE is backing in south Yemen. That was actually the runup to the separatists’ seizure of the port of Aden last week.

The Saudis cannot win this war; certainly they cannot win it alone, which is what they are now. While this is largely a proxy war against Iran for the Saudis, it has developed into a much larger threat for Riyadh because it has basically empowered and built up a Houthi force that can now only be taken out through a ground invasion. That force threatens the Saudi border because its weapons can reach Riyadh. Most recently, a Houthi drone attack targeted a Saudi oil and gas field (Shaybah), which is some 600 miles from the Houthi-controlled part of Yemen.

Pragmatism over Yemen just won out, and Iran is the key beneficiary.

Why You Should Be Worried About Argentine Elections

‘Pro-market’ Macri dropped the ball quite seriously in the run-up to Argentina’s election primaries on August 11th. He thought he would rely entirely on the fact that so many people hate Cristina Kirchner, and that this would be enough to staunch the bloodletting of his own administration’s failure. Now, at the 11th hour, and when we are only 60 days away from the actual elections, the massive 15-point spread between Macri and Alberto Fernandez (running with Kircher as his VP) appears extremely daunting. With that in mind, and possibly too late in the game, Macri is folding out a series of social benefits in an attempt to win over those voters who didn’t vote in the primaries, and those whom the polls erroneously thought would vote for Macri based on their hatred alone of what Kirchner stands for. Among the rollout of these social benefits are promises of a higher minimum wage, tax breaks, state worker bonuses and a 90-day freeze on petrol prices. Those promises aside, Macri hasn’t gotten off to a good start in the post-primary atmosphere. On Monday, he found himself apologizing for actually having blamed voters, publicly, for the market beating that ensued right after the Fernandez’s primary victory. All eyes are now on IMF negotiations, which Fernandez is using as a campaign tool. The IMF has been supportive of Macri and will be holding talks in Argentina soon. Fernandez is questioning Macri’s reform program, which is backed by a $56-billion IMF rescue package.

The problem is this: A return to Kirchner-style populism would be a disaster for foreign investors. The original play here appeared to be a move by Kirchner to insert herself into the top leadership by bringing on Fernandez so she could run as VP. Fernandez has been playing the role of a “moderate” and Kirchner has been quiet in the background. This is what helped a lot during the primaries. But the real question is whether things have gone beyond Kirchner’s control now, or whether this is all part of the play. It comes down to who controls whom with Kirchner and Fernandez. This was Macri’s major misstep: He was banking on hatred for Kirchner and ignoring Fernandez and his ability to portray himself as a pro-market moderate.

In the oil patch, it’s the prolific Vaca Muerta shale that will see its future hanging in the balance under Kirchnerism.

Global Oil & Gas Playbook

- A member of the Trump administration is reported to have secretly met with Maduro’s #1 man, Diosdado Cabello, to discuss what happens if Maduro is overthrown. Cabello is president of the National Constituent Assembly and a well-known figure in terms of corruption and criminal accusations, including the 2017 death threats against Senator Marco Rubio. Most likely, Cabello is the key figure behind Venezuela’s security forces. This means that if a high-level member of the US administration is actually meeting with Cabello, they are either getting played or Maduro’s grip on things is loosening and his position is weakening. No media reports to this effect have been corroborated at all, and it could be that these leaks are intended to create further disruption at the highest levels of Maduro’s circle.

- Iran’s seized tanker, Grace 1, has set sail again after its release by Gibraltar, against US wishes. Iran says the tanker is bound for Greece and ostensibly to Syria, setting off another diplomatic drama. The US has issued a warrant to seize the tanker on the basis that it is connected to the blacklisted Revolutionary Guards, and Greece has now bowed to US warnings, saying it would not “facilitate” the Iranian tanker, which has been renamed (in the meantime) the Adrian Darya 1. Iran stated that it would dispatch a naval fleet to escort the Adrian Darya 1 should the need arise. Iran is still holding onto the British tanker that it seized in retaliation for the Grace 1 seizure. Iran’s oil exports have fallen to just 100,000 bpd as of July. Iran has also renewed its threat against Europe saying that if it is serious about keeping the nuclear deal alive, it will order Iranian crude through INSTEX. Iran has also warned that if its oil exports are slashed to zero, the waterways won’t be safe.

- There is an apparent lull in Haftar’s offensive on Tripoli, with GNA forces claiming the upper hand and disillusionment among Haftar’s rank and file over the inability to effectively advance on the Libyan capital at this point. Haftar’s attention may have been shifted to the security situation in Libya’s oilfields following the third declaration of force majeure on oil from the Sharara field in recent months. Production at Libya’s largest oilfield has resumed, and is pumping 295,000 bpd. However, the NOC has not officially lifted the force majeure.

- Small UK gas firm Process and Industrial Developments won a major UK court case that will allow it to seize $9 billion in assets from the Nigerian govt over a gas processing plant that was scrapped a decade ago. This $9 billion figure is equal to about one-fifth of Nigeria’s total foreign reserves. The deal fell through without P&ID even breaking ground, with Nigeria failing to install the necessary pipelines or provide the gas. The lawsuit was settled in 2017, when the UK court awarded the plaintiff $6.6 billion. Since then, interest has been accruing at a rate of over a million dollars per day. But Nigeria disputed the UK court’s jurisdiction. P&ID is now ready to begin the seizure process.

- A consortium led by China National Petroleum (CNPC) has discovered oil in South Sudan in the Melut Basin near the border with Ethiopia and Sudan, estimating more than 300M barrels of recoverable oil. China dominates South Sudan’s oil industry at this point.

- Saudi Arabia’s US-based refining arm, Motiva Enterprise, has snapped up Flint Hills Resources Chemical plant near its existing Port Arthur refinery complex. It is the first of a series of petrochemical expansions that Motiva will undertake in the same area. The move into the US petrochemical business shows Aramco’s appetite for both the US market and the petrochemical market as it seeks to expand its downstream business. It also follows a major investment into the refining and petrochemical piece of India’s Reliance.

- The Bureau of Ocean Energy Management has approved Equinor’s $965 million acquisition of Shell’s Caesar Tonga Gulf of Mexico oilfield that was announced in May that gave Equinor an additional 22.45% interest in the field. Equinor’s total interest in the field is now 46%. Anadarko is the operator with a 33.75% interest, while Chevron holds 20.25% interest.

- Egypt’s President Abdel Fattah al-Sisi has appointed Admiral Osama Rabie as the new chairperson of the Suez Canal Authority. Rabie replaced Mohab Mamish who was appointed as an advisor to the president on seaports. Rabie, who served as Mamish's deputy, had once acted as the commander of the Egyptian Naval Forces. The Suez Canal is the fastest shipping route between Europe and Asia and one of the Egyptian government’s main sources of foreign currency. Earlier this month, traffic passing through the canal reached an all-time high, with 81 ships carrying 6.1 million tons.

- Turkish authorities announced that the fourth oil and gas research ship, the Oruc Reis, is on its way to the Eastern Mediterranean. Turkey currently has three ships around Cyprus, including two drilling ships. The move follows a decision by the European Union last month to slap sanctions on Turkey for what it called illegal drilling around the island.

- Permian basin players ConocoPhillips and Encana are asking regulators to reject proposal that will allow pipeline operators to offset steel tariff costs by charging its customers more. Plains All American LP pipeline operator has proposed a surcharge for the 25% tariff on imported steel for its 670,000 bpd Cactus II pipeline, which moves oil from the Permian Basin to Corpus Christi, Texas. If this is not challenged it could become a dangerous trend. Plains said it will begin charging shippers a 5 cents per barrel fee on its pipeline next April to offset higher construction costs due to the regulations and steel tariffs. Conoco and Encana, who are poised to be shippers on the line, are asking the Federal Energy Regulatory Commission to reject the proposal.