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Rakesh Upadhyay

Rakesh Upadhyay

Rakesh Upadhyay is a writer for US-based Divergente LLC consulting firm.

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The Real Reason Saudi Arabia Killed Doha

The Real Reason Saudi Arabia Killed Doha

Saudi Arabia single-handedly scuttled the Doha meeting, knowing all along that Iran would not participate, with a valid reason. The Russians and others agreed to proceed without Iran, planning to include them at a later date. So if everything was known beforehand, why did the Saudi’s pour cold water on the aspirations of the remaining members, risking its alienation from Russia and the OPEC community?

Was it simply Saudi enmity toward Iran? Not exactly. Upon closer scrutiny, we can find the Saudi masterstroke behind Doha.

It is well known that Saudi Arabia is heavily dependent on oil revenues, and that those revenues are on the brink of collapse. They have sought financial aid from various international agencies to support their dwindling economy. But the trick here is to determine exactly how desperate the Saudis are. Certainly not as desperate as other countries.

Angola has recently sought support from the International Monetary Fund (IMF). Venezuela’s struggles started well before crude prices dropped to 12-year lows and is fighting to avoid a disaster. Azerbaijan has also approached the IMF and the World Bank for help.

Nigeria is also seeking the World Bank’s support. Without external support, Iraq will find it difficult to continue its war against the Islamic State (ISIS). Lower oil prices continue to make matters worse, and Iraqi Kurdistan has taken advantage of the situation and works towards independence and beefing up its unilateral export plans. Ecuador is the worst hit, and now the devastating earthquake has crippled the nation. It will need help from the IMF, the World Bank and a few other lenders to reconstruct. Related: $91 Billion In Capex Cuts, A Serious Hangover For Oil

After a 3.5 percent contraction in 2015, Russia’s gross domestic product will take a further 1.5 percent hit in 2016, as projected by the Central Bank. Kazakhstan is faring no better. Its growth shrunk to 1.2 percent in 2015 from an impressive 6 percent in 2013 and is expected to slow down further to 0.1 percent in 2016.

Most of the participating nations are financially ruined. They have to undertake drastic measures to reduce their dependence on oil. Disaster is imminent.

The Saudis are definitely not immune, even if on the surface disaster isn’t obvious. Saudi Arabia is burning through its reserves at a record pace, but at the same time, it can sustain low prices for the next three to four years. Not only that, it can increase its production by another 2 million barrels per day, according to the International Energy Agency (IEA), if more funds are required.

But why the drastic action on the eve of the meeting disregarding the plight of the participating member nations?

Though the real reason for the about face is known only in the secretive halls of the royal palace, consider this:

Saudi Arabia has held the mantle as the world leader in oil for decades, and has largely enjoyed veto power on all things concerning oil. However, since 2014, it has waged a losing battle against the U.S. shale oil drillers, who are phenomenally more resilient than anyone expected. Related: Low Oil Price Thwarts Wider LNG Adoption in Shipping—For Now

The first signs of the shale producer vulnerability are now, however, becoming visible, with oil production in the U.S. dropping below 9 million barrels a day—the lowest in 18 months. If oil prices continue to remain below $40 per barrel, a few more shale oil producers will fall by the wayside.

But if crude prices rise above $50 per barrel, the shale producers have made their intentions clear, that they will be back in business.

If Saudi Arabia had accepted the deal, oil prices would have jumped to $50/b, giving the shale oil industry a new lease on life. Shale producers would have started pumping at a frantic pace, increasing the glut and pushing oil prices back down.

This whole exercise would permanently dent Saudi Arabia’s reputation as the leading oil player. The baton would have passed to the shale oil drillers—an event that the Saudis simply cannot allow.

With Iran’s return post-sanctions, Saudi Arabia’s leadership in OPEC is under threat. By scuttling the meeting, Saudi Arabia has asserted its supremacy and reminded the OPEC nations just how much power the Saudis still wield. Related: Oil Price Rally Unwinds As Strike In Kuwait Ends

The Saudis have ascertained their importance in the new cartel as well. They have not let Russia assume sole leadership, they have ensured that they remain at the centre of any decision making in the new cartel.

By voicing their objection to the meeting, Saudi Arabia has attempted to win back the leadership baton from American shale producers. It has shown the OPEC members that it still is the leader, thereby blocking Iran from challenging it, and finally, it has maintained its importance in the new bigger cartel, demanding an equal say in the scheme of things alongside Russia.

The Doha washout was the Saudi masterstroke to regain its importance. However, with many OPEC nations on the edge of collapse, the next OPEC meeting will confirm if the Saudi move was indeed a masterstroke, or if it was just a short-lived power grab.

By Rakesh Upadhyay for Oilprice.com

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  • JHM on April 24 2016 said:
    I suspect that the Saudis will pursue a radical new strategy. They wish to exit oil. Aramco IPO is the start, but it will only include assets downstream of the reserves. The 260 billion barrel reserves need to be liquidated as well. I believe they will begin selling off reserves as drilling rights to the tune of 2 to 2.5 billion barrels per month. This essentially taps the $350 billion oil exploration market. In about 10 years they can divest the reserves and drive up production to 24 to 36 mbpd. This level of production will make Aramco's downstream assets enormously valuable.

    If I am correct about divestment strategy, there was nothing to be gained by an oil freeze. What the oil needs is a radically lower cost of production, and the Saudis have this to offer the producers of the world. Almost no exploration cost and extremely low production cost. Only when the cheap oil is liquidated will it make economic sense to pursue more costly production, but by that time renewables and EVs can largely replace the oil industry. The value of the Saudi reserves comes down to what can be produced in the next 20 to 30 years. Hence, now is the time to start liquidating these massive reserves.
  • mtrade on April 24 2016 said:
    Wow! What an ignorant article and writer.

    Why does SA get all the hate when they have maintained they oil production at 9m/day. USA and Canada were the culprit of oil crash not OPEC or Saudi Arabia.

    It's not Saudi's fault that Shale companies have poor balance sheets, its those companies management's lack of vision and greed. Shale boom was fueled with cheap loans, thank Yellen for that.

    In fact, US Shale should thank SA and Russia for their talks that propelled prices from mid-20's in Feb to mid 40's in April enabling US companies to lock in hedges.
  • Stanley John on April 24 2016 said:
    The real reason os often to mislead the people, the main objective is that people give up all hope and the zionist investors make a killing on the stock exchange when prices increase in near future.
  • Kr55 on April 24 2016 said:
    Shale won't be roaring back at $50, I guarantee you that, and Saudi's know it too. Producers are lying about how good things will be if oil goes up a bit to keep investors from running and bailing. The cost savings they boast are only there because service companies are begging for work. The service companies are no longer staffed to support any ramp up of shale, if shale wants to ramp up, they have to fight for services and those cost savings disappear in a flash and they're right back to needing $60+ oil to break even on anything.
  • John Scior on April 24 2016 said:
    Just the prospects of an organized reduction or freeze seems to have lifted prices. Another meeting is in the works for May. Furthering speculation and keeping prices high despite rising inventories , strategic petroleum reserves filling, as well as difficulty in finding oil tankers to transport as many are being utilized as storage until prices rise. One beneficial aspect is that it signals to the world the producers are beginning to coalesce and try to form some kind of restrictions on output. The Iranians are anxious to capitalize on lifting of sanctions but they too will ultimately realize the benefit of coming to the able so to speak. I'm sure the target price ( and related production output goal ) is one that keeps alternative fuels, EV's, and shale oil producers off to the sideline ( economically constrained as being unprofitable ) but that allows Iran, Iraq, Libya to re-emerge on the market. Just a guess , but I'd say in the 32-34 per barrel range. what do you say fellas ??? Lets make a deal.
  • HTS on April 25 2016 said:
    The history of this writer is dirty. He has lots of hate towerd Saudi Arabia!
    He's 100% biased
  • Sal on April 25 2016 said:
    Assuming that Saudi Arabia makes highly rational decisions and policies, not to mention acts on its own without a cue from the US on whom it greatly depends, and that these politico-economic games can be precisely engineered, is quite naive to say the least. Major structural changes and investment in education is the only answer to the economic problems. But greater education without social and political reforms spells trouble to the ruling elite.
  • Mike on April 25 2016 said:
    Do you think the Royal family will buy up a good portion of the ipo shares. Then cut back production? FYI. I did not use my real name for a reason
  • Bill Simpson on April 26 2016 said:
    And the longer they can keep the oil price low, the less oil exploration takes place outside Saudi Arabia. So the lower the supply of oil on the market in the intermediate term will be. Since there is no substitute for oil, within a few years, the world will have to go to the Saudis for a greater share of more expensive oil. So they end up selling more oil, at a higher price. It is a win - win. All they need to do is tough it out for a couple more years. And hope Iraq and Libya don't get their act together. Not much chance of that, with the 'Islamic State' blowing stuff up.
    The danger is that they might create a physical oil shortage. That could take down the entire debt laden financial system, by forcing the real economy to shrink from lack of oil products to perform the work needed to expand the economy. Without banks operating, all the oil in the world won't put food in your mouth. Nothing happens without them.
  • Ken LaBry on April 26 2016 said:
    JHM is quite correct and the House of Saud has some very bright and shrewd members who realized this some time ago and were waiting for the time where it would be necessary to pivot. It seems that they have hit that just about spot on as well.
  • Michael on April 27 2016 said:
    A perfect example why all international organizations; World Bank, IMF, NATO and UN should be abolished. Totalitarianism, SOCIALIST, state of Saudi Arabia is appealing for aid, the richest oil producer is in economic trouble. International organizations assist in propping up hate and socialism. Its no wonder that the 9/11 commission refuses to release its finding that outline Saudi Araibia's envolvement.
  • Gunzo on April 30 2016 said:
    Saudis are losing their market share one way or the other and in the process their minds too. They are exposed. Oil is not going to go up and Saudis would be bankrupt sooner than you think.
  • pradeep on May 13 2016 said:
    I don't think the shale production could make Saudi lower from its domination in Oil Industry. Moreover shale oil production cant be done by just 50$/barrel the break even needs to cross over 70 - 75$ dollars to have a viable fracking technique. More over Saudi Desperately needs to Increase the barrel price they cant continue for few more years by doubling the production it is expected they need to reach soon 75$/barrel to settle back to their normal. If this continues for them for 4 years they would go Bankruptcy so even they are desperate to Increase the barrel price that's the reason they had invited Russians to come for an agreement to reduce the production but due to their supplies to Chinese that made Russians to disagree so no way they want the barrels to remain less then 50$ within this week my prediction it might reach as the production in Nigeria stoppage and for FortMcMurray to recover the oil price will reach even if Saudi cancels next meeting on June2

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