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Tim Daiss

Tim Daiss

I'm an oil markets analyst, journalist and author that has been working out of the Asia-Pacific region for 12 years. I’ve covered oil, energy markets…

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Is Saudi Arabia’s Geopolitical Pivot Good For Oil?

Riyadh skyline

The phrase “becoming all things to all people,” might also apply to modern-day Saudi Arabia. The world’s largest oil exporter, defacto OPEC leader and the third largest oil producer finds itself in new territory over a host of issues.

In its bid to challenge Iran for dominance in the Middle East, the Kingdom has set a hard line against virtually all things Tehran-related, while that stance has also brought it closer to long-time ally, the United States.

Saudi Arabia’s distain for Iran’s influence in the region, including its backing of Syrian President Bashar al-Assad in that country’s prolonged civil war, as well as the Iranian-led proxy war in Yemen, has also brought a historic overture of what could only be described as possible friendship toward longtime adversary Israel.

Last month, reports out of Israel indicated that there had been secret meetings in Cairo between top Israeli and Saudi Arabian officials, coming just days ahead of President Trump’s unveiling of his long-awaited Middle East peace plan.

Also, the same week, Air India confirmed plans for a direct route between Tel Aviv, Israel and Delhi, with the flight being given permission to fly over Saudi airspace, a first, according to a report in The Times of Israel. The announcement came a few days after Israeli Prime Minister Benjamin Netanyahu told reporters that the Saudis had given the go-ahead to Air India to fly through its airspace to and from Tel Aviv.

Previously, flights bound for Israel were not permitted to fly over Saudi Arabia or most other Arab nations, which did not have formal relations with Israel.

New leadership makes major pivot

Moreover, as Saudi Arabia passes the baton of leadership to a new generation of Saudis, under Crown Prince Mohammad bin Salman, this friendlier stance, albeit in small gradations, toward Israel could continue. Related: Canada’s Oil Patch To Turn Profitable In 2018

On his recent much-heralded trip to U.S. a few weeks ago the young prince said that Israel has “a right to their own land” – a monumental foreign policy shift for a country that had been integral in both the 1967 Six Dar War against Israel and the corresponding oil embargo against the West that followed that year, as well as the 1973 Yom Kippur War (also known as the 1973 Israeli-Arab War), and the associated Arab oil embargo that roiled global oil markets, bringing the U.S. and Western powers to their knees and changing global oil market dynamics for decades.

The stated-goal of both embargoes was to pry the U.S. away from supporting Israel. Both attempts failed in that endeavor as the U.S. was instrumental in supplying the military equipment to Israel in 1973 that helped turn the tide of war and ushered in ultimate Israeli victory against the superior numbers of Egyptian, Syrian, Jordanian and Iraqi forces.

The Saudis, also in their effort to wield the oil weapon on these two occasions, caused such a backlash in the U.S. and Europe that the superpowers began conserving oil, setting up crude reserves, and gaining more control over their own energy usage. Saudis and OPEC hurt themselves not only geopolitically but also in terms of drying considerable demand for their crude oil.

Hard questions

Now, it seems that all of this is to be forgotten or at least brushed aside as newer realties in Syria and Yemen take hold. Yet the question has to be asked: Is this Saudi pivot good for global oil markets? This question is even more pronounced given that any ongoing Saudi-Iranian tensions could be a spoiler for the upcoming decision by OPEC and non-OPEC producers to renew its early 2017 oil production cut that has brought OECD oil inventory levels to five-year averages and restored a floor under oil prices as well as restoring a semblance of oil market equilibrium. Related: China To Double Shale Gas Output

Moreover, the answer to our question also depends on who you ask. For oil producers, higher oil prices amid geopolitical developments can offset the two-year period, 2015-2016, of historically low prices that slammed producers’ coffers, particularly Saudi Arabia who began to run huge budget deficits. To date, the Saudis are still offering bonds on international markets to address their budget woes. Higher oil prices in lock step, will help remedy these financial problems.

On the other hand, major oil consuming nations, especially the world's top economies, the U.S., China, Japan and others would obviously prefer to not see higher oil prices since it can eat into economic growth, which, in time, will lower oil demand and impact Saudi Arabia and OPEC producers once again.

But for now, there is a new geopolitical game in the Middle East unfolding, and Saudi Arabia is taking the lead, all the while intersecting Trump’s new more muscular stance in the region – global oil markets will have to wait to see what else develops.

By Tim Daiss for Oilprice.com

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  • Mamdouh G Salameh on April 18 2018 said:
    Oil is like a coin: one side is economics and the other is geopolitics and the two are inseparable.

    Based on this principle, any geopolitical tension could help oil prices for a short while. But the global oil market has already factored in geopolitical tension in Middle East politics as a constant factor unless there is a disruption of Saudi, Iraqi or Iranian oil supplies.

    Saudi Arabia is currently happy with the surge of oil prices upwards though it is hoping that prices could rise beyond $80 a barrel this year and ultimately higher than $100. This is a price Saudi Arabia and most OPEC members need to balance their budgets. Moreover, for a country like Saudi Arabia sitting on the world’s second biggest proven reserves of oil, it is a sound economic principle to try to maximize its earnings through the highest oil price the global economy can tolerate.

    There is circumstantial evidence suggesting that hawks in Saudi Arabia may be deliberately escalating tension with Iran in order to push the oil price up. The threatening noises coming from Saudi Arabia against Iran point that way. Saudi Arabia has made it abundantly clear that it opposes Iran’s nuclear programme, its involvement in Syria and possibly Yemen and its rising influence across the Arab world.

    Still, neither Saudi Arabia nor Iran envisage an open conventional war between them.
    However, Saudi Arabia is well advised to build bridges of trust and understanding with Iran. It is far more economical and beneficial and strategically desirable to talk to Iran rather than invite a potentially devastating war to the Gulf region or destabilizing the region by military adventures. By coordinating their oil policies, Saudi Arabia and Iran could devise a way to push the oil prices up to their mutual benefit and also the benefit of oil producers in the Gulf.

    Saudi Arabia is an Arab country first and foremost. Its reported recent friendly gestures towards Israel are no more than sharing enmity with Israel against Iran. They are based on the opportunistic principle that “the enemy of my enemy is my friend”. Iran is the common enemy. But once this issue is resolved, Saudi Arabia will forget about future relations with Israel. Saudi Arabia will always uphold the rights of Palestinians to establish a homeland in Palestine.

    And while geopolitical tensions in the Middle East could add $2-3 to a barrel of oil, Saudi Arabia’s political pivot towards Israel and against Iran is, in my opinion, misguided and morally and geopolitically wrong.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London

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