Tuesday, May 16, 2017

Saudi-Russian Oil Alliance Cemented

Soon I will be seeing stories that the king is a Russian stooge.

"As their clout wanes, Saudi Arabia and Russia extend oil production cuts" by Stanley Reed New York Times  May 16, 2017

With oil markets flagging, the world’s two biggest oil exporters agreed Monday to extend production cuts for several months, sending the price of crude soaring.

Countries like Saudi Arabia and Russia are trying to manage the markets, and the latest swings are proving problematic for global producers. For years, Saudi Arabia and other nations in OPEC were often able to easily prop up prices. But their clout has ebbed as new players like US shale producers came into the market and the growth in demand for oil slowed.

Amid weak prices late last year, OPEC countries, along with Russia, agreed to cut around 1.7 million barrels from their collective output. It worked for a while as markets recovered. But the higher prices also drew in OPEC’s rivals, including shale oil producers in the United States. 

Those are the shales operations that were shut down upon which the banks extended their loans to avoid default. Now they can start ramping up and paying again.

That is forcing Saudi Arabia and Russia to step in again. The two countries agreed Monday to lower their production levels for nine months longer than originally agreed, through March. OPEC, of which the Saudis are the de facto leaders, is likely to follow suit when its 13 members meet in Vienna on May 25. Oil prices rose to their highest level in weeks after Monday’s announcement.

“What OPEC, and to some extent Russia, and these other countries have been doing since the price collapse of 2014 is pretending to manage the market,” said Robert McNally, a former White House energy adviser who is president of the Rapidan Group, a Washington-based research firm, and the author of a recent book on oil booms and busts titled “Crude Volatility.”

In reality, McNally said, they were simply “managing or manipulating sentiment.”

Like the Federal Reserve does here.

OPEC and other big oil producers, in effect, are no longer the only voice in the market.

It is a marked shift for a bloc that even today accounts for about a third of the world’s oil production. In the late 1990s, a series of cuts by OPEC, as well as other producers outside the organization, lifted prices after a collapse to the $10-per-barrel range.

Now, they are fighting a wave of forces beyond their control.

In the short term, large amounts of crude remain unsold and in storage. Saudi Arabia and Iran, in particular, have been selling some of those stores, blunting the impact of the cuts, according to Richard Mallinson, an analyst at the research firm Energy Aspects. And higher prices in recent months have thrown a lifeline to shale oil companies in the United States, where output had plunged when prices fell. With prices around $50 a barrel, production from shale companies is surging again.

Shale and other sources are likely to fill in whatever gaps OPEC production cuts created in the market. And OPEC may be making things easier for shale producers by agreeing to rein in output for such a long period.

“It is now becoming very clear that the cuts aren’t making the oil market rebalance sooner,” said Rob West, a partner at Redburn, a market research firm in London. “They are prolonging the glut.”

The glut was also prolonged because the economy and spending is not nearly as rosy as the government and pre$$ claim. It would be an ancillary effect (like McDonalds) if the economy were good. Think the retail crisis. If it were a good economy, more oil would be being used.

In the longer term, increased use of electric cars and more efficient use of energy may contribute to slowing growth in world demand, analysts say. In April, the International Energy Agency, the Paris-based monitoring group, forecast that oil demand growth would slow in 2017 for the second straight year, citing gains in the fuel efficiency of motor vehicles in the United States in particular.

That I would agree with.

In a statement Monday, Saudi Arabia and Russia said they had “agreed to do whatever it takes to achieve the desired goal of stabilizing the market,” adding that a deal between major oil exporters to reduce production should be extended through the end of March.

The two countries said they would work with others before the Vienna meeting, “with the goal of reaching full consensus on the nine-month extension.”

“What they looked to do,” said Mallinson, the analyst, “is send a positive surprise by exceeding market expectations.”



"A spurt in oil prices on Monday revived energy stocks, which have been among the year’s worst performers, and helped push the broader market back to record highs. The price of oil jumped on expectations that the global glut of crude may ease. A group of oil-producing countries has cut production in hopes of supporting the price of oil, and Russia and Saudi Arabia said they want to extend the cuts through the first three months of 2018. Benchmark US crude rose $1.01, or 2.1 percent, to settle at $48.85 per barrel. The price of oil has swung sharply in recent years, from more than $100 three years ago to less than $30 last year. Monday’s rise for crude helped oilfield services provider Halliburton jump 3 percent, for one of Monday’s biggest gains in the S&P 500. Energy companies across the index rose 0.6 percent. Companies that produce metals and other basic materials, along with financial stocks, were also strong. For the most part, signs of a strengthening global economy and improving corporate profits have been enough to allay investors’ fears and push markets to new heights. The recent calm is a sharp turnaround from the start of 2016, when twitchy investors were quick to sell on worries about the global economy."

What goes unmentioned here is the role of the petrodollar. Were the Saudis to stop selling their oil in dollars they would be invaded and occupied by the U.S. faster than you can say Iraq because the collapse of the dollar as a reserve currency would send prices skyrocketing in AmeriKa. It would then be Venezuela.