While Israel has been the barking dog pushing hostilities against Iran, it is the Saudis that are truly most threatened by Iran’s return to the global economy. They are as much, if not a bigger, agitator for tearing up the Iran Nuclear Deal as Israel has been.
A report earlier this week from the International Monetary Fund argued that Saudi Arabia still needs oil trading at $88 per barrel to balance its budget and pull off the structural reforms the country needs.
Crown Prince Mohammed bin Salman’s Vision 2030 plan, which has the usual suspects in Washington salivating at the prospect of leaching off of, will require a complete make-over of Saudi society. It will likely cost trillions. And the Saudis still have a big budget deficit.
It is set to shrink to a more manageable 7 percent of GDP this year while expanding government spending by more than 5 percent.
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2018 Cuts the Deficit to 7.3 percent of GDP, thanks to $70/bbl Oil
And the only thing keeping this budget deficit moving lower is, of course, higher oil prices. Last year’s breakeven point was just $70 per barrel. But that rises this year to $88 according to the IMF because Bin Salman has begun the spending associated with Vision 2030.
Now, since the implementation of the Iran Nuclear Deal (JCPOA) Iran’s oil output has risen back to its pre-sanctions level of around 3.8 million barrels per day.
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Iran’s Oil Production Now Exceeds, on Average, it’s Pre-Sanctions Level in 2012
With new exploration and production deals signed by European, Chinese and Russian oil majors Iran’s output over the next few years could easily push over 4 million barrels if not closer to 5 million.
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While at the same time Saudi Arabia wants to both cut back on production and its exports to raise the price per barrel to the level it needs. So, it shouldn’t take a genius to see the incentive here to try and bribe President Trump with hundreds of billions in arms sales and promises of fighting Iran in Syria to get him to de-certify the JCPOA and have the deal fall apart.
U.S. Mob Rule
The Saudis, to some extent, are being shook down by Trump, Mafioso-style, for our nuclear shield. In exchange for help bottling up Iran and raising oil prices the Saudis will have to spend a lot of their savings pump-priming the U.S. economy with new refineries in Texas and more planes to drop bombs on weddings.
You know, win/win.
If the Saudis need $88 per barrel oil, then Iran has to have its output cut to offset the rising price per barrel.
With the reports that U.S. Green Berets are present on the battlefield in Yemen should tell you that the Trump Administration is uninterested in any outcome in the Middle East that doesn’t end with Iran’s capitulation to Israeli and Saudi (and therefore U.S.) needs and Russia and China’s humiliation for backing Iran.
The White House is fully staffed with people willing to commit or condone the worst human rights violations in Yemen and Syria in order to stop Iran.
The question is, “Stop Iran from what?” The conventional answer from Trump and K-Street foreign policy ‘experts’ is, “Gaining a nuclear weapon.” The real answer, however, is much simpler than that.
Iran will not be allowed to re-join the global economy as an independent actor. That position will be maintained even if the theocracy is overthrown. Because this supposed existential fight to the death between Saudi Arabia and Iran has little to do with religion and old enmities.
It has to do with oil. Saudi Arabia wants Iran back to less than 3 million barrels a day to support higher prices. Israel and the U.S. want to starve the Iranian government of money, so pulling out of the deal will allow the U.S. to re-impose sanctions on Iran, cutting it out of the global banking system again.
But Iran being back to pre-2012 production levels and removing the U.S. dollar from its oil trade officially means that China has a different partner to buy its oil from. And that supports the fledgling petroyuan system developing in Shanghai financial markets.
The China Syndrome
Sinopec is set to curb imports of Saudi Oil another 40 percent this month citing inexplicable high prices from the Saudis during a time when a significant portion of Sinopec’s refineries are down for annual maintenance and other producers are happy to offer more for less to grab market share.
Last month, a Unipec official told Reuters, “Our refineries think these are unreasonable prices as they do not follow the pricing methodology.” Besides Sinopec, a source from another two refineries in northern Asia said they will be cutting their imports from Saudi Arabia by ten percent as oil buyers have a hard time grasping how the Kingdom is calculating the price for its most popular grade.
The price increase came as a surprise to the biggest market for crude in the world.
Aramco is pushing China at a time when it’s clear it has other options in the oil market and no longer wants to pay for oil in dollars. Brazil’s imports to China have risen sharply. Iran’s imports to India, tangentially related, are set to double this year to nearly 400,000 bbl/day.
Trump may want the Saudis, again mafioso-style, to raise its prices to get China to import U.S. oil as the Brent/WTI spread continues to widen, now over $6, to combat the U.S. trade deficit with China. Not that that makes a lick of sense, but then again, Trump is a mercantilist, which also doesn’t make any sense. Related: The Next Big Trend In Offshore Oil & Gas
So, at least its consistent.
U.S. production keeps surging and will continue for likely the rest of 2018 and beyond as new fracking techniques lengthen the production time of new wells, albeit at lower daily output.
So, even if rig counts fall, which it shows no signs of doing, U.S. shale oil output will keep rising. Brent output is falling, U.S. production is rising. So, the Brent/WTI spread will continue to widen if new ‘markets’ aren’t opened up for U.S. shale producers.
This again, brings me back to the Iran Nuclear Deal being all about oil and not about bombs. Ending the deal will allow Iran to restart its program which the conventional wisdom says they can spin up to a viable weapon within 18 months, quicker if its partner North Korea was successful in producing a viable warhead.
But, having removed Iran from the SWIFT financial payments network and seen Iran survive it, the threat of sanctions and SWIFT expulsion seem hollow. Both China and Russia have viable SWIFT alternatives and Iran has so few ties to both U.S. and European banking institutions after nearly a decade of hostilities.
Moreover, Turkey, who helped Iran survive without SWIFT in the past, is more than happy to stick it to the U.S. after its backing the Syrian Kurds. In short, Iran has a lot more friends today than it did in 2012.
China and Russia are immensely stronger. Israel and Saudi Arabia far weaker. And that means that regardless of what Trump does on May 8th, the world is already prepared for the next steps.
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So, it's literally written in the caption of the title / header of this article...that there is no need for speculators to risk their finances when ultimately this comes down to a rift between Saudi Arabia and Iran. My guess is the Saudis will get their price point, traded on behalf of hedge fund managers via algorithmic long positions at the expense of everyone else in the world.
We are caught in the middle...either as speculators or consumers. I personally will not be doing their bidding. I still don't understand how when contractors are imported into Saudi Arabia from the U.S., Britain, and Canada for oil facilities, and all workers are imported (e.g., India) to do all the work, how can they have a budget deficit? From overspending on luxuries?
I'd be upset but Saudi Arabia may be doing the world a favor by once again holding the world hostage and pushing up the price of oil to extreme levels not justified by supply and demand. This is the 70, 80s, or 90s. Oil and gas are not scarce commodities about to run out. High prices have the U.S. shale oil and gas industry humming, and would have Canada doing the same except for Trudeau actively working to destroy that nation's energy industry. $88 plus oil won't just hammer demand, it will cause the world to do two things. Produce more hard to get oil & gas at a faster rate and lower cost then anytime in history. Get it to market in month rather than year increasing the supply of oil beyond the ability of OPEC/Russia to idle capacity. Second these prices give the world a reason and a window to rush even faster to renewable energy, grow market share, and reduce costs. Saudi Arabia is going to hammer demand with $88 plus oil, create an oil rush that will increase supply far faster than they imagine, and spur renewables. Saudi Arabia better need $88 oil pretty short term, and then be ready for the crash or its going to be in a world of hurt.