Tag Archives: Oil

Russia’s High Risk Global Oil Strategy, by Vanand Meliksetian

Russian oil companies are rushing in where western oil companies fear to tread. From Vanand Meliksetian at oilprice.com:

The energy industry is highly sensitive to U.S. sanctions due to the petrodollar being the single most important currency in global trade. Washington is able to exert significant influence by limiting access to the dollar through its financial institutions. Russia is especially exposed to Washington’s ire as a significant part of its governments’ coffers are filled by revenues from its oil and gas sector. In recent years, Russian companies have been increasing their activities in several unstable countries where the U.S. has imposed sanctions. This tactic from Russia comes with huge opportunities but also a significant amount of risk.

The level of this risk is illustrated by the absence of western oil companies in these areas as they are accountable to their shareholders. Privately held companies also struggle to operate in these areas due to their reliance on international financial markets and the difficulty with carrying out due diligence. Venezuela and Iran are prime examples of oil rich areas that are struggling under U.S. sanctions.

At the same time, absence of many major western oil companies in unstable regions is one of the reasons why Russian companies, both majority state-owned and privately held organizations, have got involved. Limited competition strengthens the position of Russian firms during negotiations. The host countries face a predicament in many cases as they have to choose between a bad deal or no deal at all.

A prime example of this is Moscow’s involvement in Iran, which has been ongoing for years. Even during the years of sanctions due to Tehran’s nuclear program, Russia was able to strike a barter deal where Iranian oil was exchanged for other products. This deal bypassed the international financial system and sanctions. Even now when the U.S. has unilaterally withdrawn from the Iran Nuclear Deal and is about to reinstate sanctions, Moscow and Iran are intensifying cooperation.

Days before the Helsinki summit and the meeting of Presidents Putin and Trump, Iranian officials struck a deal in Moscow for an investment of $50 billion in the oil and gas sector. While western firms are reluctant to continue doing business in Iran, let alone increase cooperation, Russian firms are seizing the opportunity to boost their portfolio with even more Middle Eastern assets.

To continue reading: Russia’s High Risk Global Oil Strategy

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Iran Warns Trump Not To Cut Off Oil Exports, Threatens “Mother Of All Wars”, by Tyler Durden

Iran is issuing dire threats if the US blocks its oil exports. From Tyler Durden at zerohedge.com:

Iran’s president Hassan Rouhani warned the US not to threaten the nation’s oil exports, called for improved relations with its neighbors including arch-nemesis Saudi Arabia, and cautioned the US that a conflict with Iran would be “the mother of all wars.”

Don’t play with the lion’s tail, this would only lead to regret,” Iran’s leader said during a speech with Iranian diplomats on Sunday, the semi-official Iranian Students’ News agency reported. “The Americans must understand well that peace with Iran is the mother of all peace, and war with Iran is the mother of all wars” he said, adding that Iranians will only be united by further threats from the US, and that the Islamic Republic “will certainly defeat America.”

Iran military drill in the Strait of Hormuz, photo credit: AFP

The latest attack against president Trump by Rouhani came one day after Supreme Leader Ayatollah Ali Khamenei backed the idea of blocking all oil exports from the region by closing the Strait of Hormuz in the event of Iran’s exports being banned. He also said that “U.S. govt.’s words or even signatures cannot be relied on; thus negotiations with the U.S. are useless. The assumption that negotiations or establishing ties with the U.S. would solve country’s problems is an obvious error.”

While Iran’s belligerence toward the US (and vice versa) is nothing new, there was a surprising twist when Rouhani said that Iran would seek improved relations with its Arab neighbors in the Persian Gulf, including Saudi Arabia, the United Arab Emirates and Bahrain, according to Bloomberg. But he also said Saudi Arabia still needs to “change its actions, let go of obstinacy and be willing to have relations.”

Iran’s anger is the result of Trump’s recent decision to withdraw from Obama’s landmark nuclear deal, and Trump’s subsequent pressure on US allies to completely cut imports of Iranian crude in response to Tehran’s alleged malign activities. Those who fail to comply with America’s request would be targeted by secondary US sanctions. Following Trump’s withdrawal, Iran has been working with the EU to salvage the 2015 the accord.

To continue reading: Iran Warns Trump Not To Cut Off Oil Exports, Threatens “Mother Of All Wars”

How Bad Is Iran’s Oil Situation? by Nick Cunningham

Trump may be able to meaningfully curtail Iran’s oil exports. From Nick Cunningham at oilprice.com via wolfstreet.com:

“There’s a really big gap between what foreign governments are saying and what companies are saying.”

The U.S. government has continued its attempts to shut down Iran’s oil exports, and in recent days Iranian officials responded by threatening to block the Strait of Hormuz. Such an outcome is highly unlikely, but the war of words demonstrates how quickly the confrontation is escalating.

Oil prices spiked in late June when a U.S. State Department official said that countries would be expected to cut their imports of oil from Iran down to “zero.” The official also suggested that it would be unlikely that the Trump administration would grant any waivers.

This hard line stance fueled a rally in oil prices as the oil market was quickly forced to recalibrate expected losses from Iran, with a general consensus changing from a loss of around 500,000 bpd by the end of the year, to something more like 1 million barrels per day (mb/d), or even as high as 2.0 to 2.5 mb/d in a worst-case scenario in which all countries comply.

A loss of that magnitude would be hard to offset, even if Saudi Arabia decides to burn through all of its spare capacity.

That led to a dialing back of the rhetoric from the Trump administration, or so it seemed. A follow-up statement from the State Department suggested that the U.S. government would work with countries on a “case-by-case basis” to lower Iranian oil imports. High oil prices seemed to put pressure on Washington.

But for now, there is no policy shift. “I think there’s going to be very few waivers. That’s what we’re hearing all the time from officials across the administration. I think it’s a very strong policy decision,” Brenda Shaffer, an adjunct professor at Georgetown’s School of Foreign Service, told Oilprice.com.

Time will tell, but early evidence suggests that the Trump administration is having success convincing top buyers of Iranian crude to curtail their purchases.

South Korea reportedly plans on zeroing out its imports of oil from Iran in August, according to Reuters. Sources told Reuters that Japan plans on buying oil from Iran for the next few months, but will likely come under pressure to cut imports as the November deadline approaches.

To continue reading: How Bad Is Iran’s Oil Situation?

 

Saudi Arabia Won’t Bring 2 Million Bpd Online, by Nick Cunningham

President Trump wants Saudi Arabia to bring 2 million barrels per day online, but it’s not clear Saudi Arabia could so or if they’re so inclined. From Nick Cunningham at oilprice.com via wolfstreet.com:

President Trump said in a tweet on Saturday that Saudi Arabia agreed to boost oil production by 2 million barrels per day (mb/d), a claim that surely came as news to the Saudis.

The tightening of the oil market has pushed up prices, which is always a concern for U.S. politicians wary of catching heat from their constituents.

The decision by OPEC+ in June to hike production by 1 mb/d looks increasingly inadequate in dealing with the growing number of supply outages around the world. It’s no surprise that Trump wants more Saudi oil on the market, but he likely misunderstood what the Saudis told him.

Saudi Arabia was producing 10 mb/d in May and recent reports suggest they might add as much as 800,000 bpd to 1 mb/d in July, a massive increase in such a short period of time.

But it’s a far cry from the 2 mb/d that Trump thinks Saudi Arabia will add. That would translate into overall production of around 12 mb/d, which is probably unrealistic for a few reasons.

First, there are technical questions about how far and how fast Saudi Arabia can push its oil fields. Can they ramp up to 12 mb/d? Probably, but there is not a lot of historical evidence to go on. Also, they probably can’t do it immediately, it would take time, perhaps more than a year.

The second – and more important – reason why Saudi Arabia won’t comply with Trump’s wishes to add another 2 mb/d onto the market is that they don’t want to. Ramping up that much would leave the oil market dangerously low on spare capacity, cutting it down to less than 1 mb/d. At that point, any supply disruption would send oil prices skyrocketing. Indeed, it wouldn’t even take a tangible disruption – the mere possibility of another outage would lead to a significant volatility.

To continue reading: Saudi Arabia Won’t Bring 2 Million Bpd Online

Turkey and India Have Leverage in Trump’s Iran Sanction War, by Tom Luongo

Trump is not going to get universal compliance with his sanctions against Iran. From Tom Luongo at tomluongo.me:

Both India and Turkey have said they will defy President Trump’s call for them to stop buying Iranian oil once the U.S. reapplies sanctions in November.  That isn’t really news.

Both of them defied the Obama administration in 2012, albeit in different way. Turkey changed its banking rules to monetize gold and used its gold reserves as a means to launder Iranian oil payments for third parties through its banking system.

India bypassed cutting off Iran from the U.S. dollar by beginning a goods-for-oil swap program.

Today, however, the geopolitical background is far different.  Today, Iran can and does list its oil for sale in Shanghai’s futures market payable in Chinese Yuan.  Turkey can recycle its Yuan it receives from its large trade deficit with China to up its purchases of Iranian oil if need be.

But, more importantly, both India and Turkey have geopolitical freedoms they didn’t have in 2012.  I have covered the Turkey angle on this at length.  India, on the other hand, I haven’t.

Iran has become Turkey’s biggest oil importer.

Turkey, a NATO ally, is dependent on imports for almost all of its energy needs. In the first four months of this year, Turkey bought 3.077 million tons of crude oil from Iran, almost 55 percent of its total crude supplies, according to data from Turkey’s Energy Market Regulatory Agency (EPDK).

President Recep Tayyip Erdoğan last year said Turkey was looking to raise the volume of its annual trade with Iran to $30 billion from $10 billion.

And it doesn’t look like this will change with Trump’s sanctions.

With President Erdogan winning re-election he now goes into the NATO Summit with Trump on July 11-12th with a lot of leverage.  Erdogan has openly courted Russia on energy supplies.

It just began construction on its first nuclear power plant being built by Russia which is due to begin generating power by 2023.  But, in the near term, Turkey is in bed with Gazprom on the Turkish Stream pipeline, which is ready to begin the land-based portion.

To continue reading; Turkey and India Have Leverage in Trump’s Iran Sanction War

China’s Oil Trade Retaliation is Iran’s Gain, by Tom Luongo

Starting a trade war is like dropping a bomb, you never know what’s going to blow up. From Tom Luongo at tomluongo.me:

I’ve told you that once you start down the Trade War path forever will it dominate your destiny.

Well here we are.  Trump slaps big tariffs on aluminum and steel in a bid to leverage Gary Cohn’s ICE Wall plan to control the metals and oils futures markets.   I’m not sure how much of this stuff I believe but it is clear that the futures price for most strategically important commodities are divorced from the real world.

Alistair Crooke also noted the importance of Trump’s ‘energy dominance’ policy recently, which I suggest strongly you read.

But today’s edition of “As the Trade War Churns” is about China and their willingness to shift their energy purchases away from U.S. producers.  Irina Slav at Oilprice.com has the good bits.

The latest escalation in the tariff exchange, however, is a little bit different than all the others so far. It’s different because it came after Beijing said it intends to slap tariffs on U.S. oil, gas, and coal imports.

China’s was a retaliatory move to impose tariffs on US$50 billion worth of U.S. goods, which followed Trump’s earlier announcement that another US$50 billion in goods would be subjected to a 25-percent tariff starting July 6.

It’s unclear as to what form this will take but there’s also this report from the New York Times which talks about the China/U.S. energy trade.

Things could get worse if the United States and China ratchet up their actions [counter-tariffs]. Mr. Trump has already promised more tariffs in response to China’s retaliation. China, in turn, is likely to back away from an agreement to buy $70 billion worth of American agricultural and energy products — a deal that was conditional on the United States lifting its threat of tariffs.

“China’s proportionate and targeted tariffs on U.S. imports are meant to send a strong signal that it will not capitulate to U.S. demands,” said Eswar Prasad, a professor of international trade at Cornell University. “It will be challenging for both sides to find a way to de-escalate these tensions.”

But as Ms. Slav points out, China has enjoyed taking advantage of the glut of U.S. oil as shale drillers flood the market with cheap oil.  The West Texas Intermediate/Brent Spread has widened out to more than $10 at times.

WTIC-Brent-Spread

By slapping counter tariffs on U.S. oil, that would more than overcome the current WTIC/Brent spread and send Chinese refiners looking for new markets.

Hey, do you know whose oil is sold at a discount to Brent on a regular basis?

Iran’s.  That’s whose.

To continue reading: China’s Oil Trade Retaliation is Iran’s Gain

The Summer of Discontent, by James Howard Kunstler

The world has too much debt and not enough oil. From James Howard Kunstler at kunstler.com:

The ill-feeling among leaders of the G-7 nations — essentially, the West plus Japan — was mirrored early this morning in the puking financial market futures, so odious, apparently, is the presence of America’s Golden Golem of Greatness at the Quebec meet-up of First World poobahs. It’s hard to blame them. The GGG refuses to play nice in the sandbox of the old order.

Like many observers here in the USA, I can’t tell exactly whether Donald Trump is out of his mind or justifiably blowing up out-of-date relationships and conventions in a world that is desperately seeking a new disposition of things. The West had a mighty good run in the decades since the fiascos of the mid-20th century. My guess is that we’re witnessing a slow-burning panic over the impossibility of maintaining the enviable standard of living we’ve all enjoyed.

All the jabber is about trade and obstacles to trade, but the real action probably emanates from the energy sector, especially oil. The G-7 nations are nothing without it, and the supply is getting sketchy at the margins in a way that probably and rightfully scares them. I’d suppose, for instance, that the recent run-up in oil prices from $40-a barrel to nearly $80 has had the usual effect of dampening economic activity worldwide. For some odd reason, the media doesn’t pay attention to any of that. But it’s become virtually an axiom that oil over $75-a-barrel smashes economies while oil under $75-a-barrel crushes oil companies.

Mr. Trump probably believes that the USA is in the catbird seat with oil because of the so-called “shale oil miracle.” If so, he is no more deluded than the rest of his fellow citizens, including government officials and journalists, who have failed to notice that the economics of shale oil don’t pencil out — or are afraid to say. The oil companies are not making a red cent at it, despite the record-breaking production numbers that recently exceeded the previous all-time-peak set in 1970. The public believes that we’re “energy independent” now, which is simply not true because we still import way more oil than we export: 10.7 million barrels incoming versus 7.1 million barrels a week outgoing (US EIA).

To continue reading: The Summer of Discontent