Saudi Arabia: the new OPEC

OPEC's rearguard seems to have momentarily  stopped the exponential slide in oil prices. It seems there is a level  where all interests converge to stabilizing the price.

• Saudi Arabia has clearly warned of the negative implication of continued US  production.
• Iran and Russia have been painfully reminded not to meddle too much in their neighbors affairs,  or suffer the consequences.  
• OPEC has been thoroughly  tamed. 
• The US consumers can happily drive to their Thanksgiving dinner without being bankrupted.

However, with the OPEC meeting eminent it is clear that consensus will not be achieved to multilaterally cut the OPEC production ceiling. The new OPEC  is  an effective vehicle  for Saudi Arabia  to  unilaterally manage Middle Eastern oil.

The unilateral actions by Saudi Arabia has damaged the relationships within OPEC beyond repair.  It is virtually impossible to differentiate between the sectarian battles on the ground and the groupings within OPEC.

The growing mistrust between Iran and Saudi Arabia and the collection of failed states and minnows that make up the rest of OPEC have only self interest as their priority and currently Saudi Arabia either funds  or  subsidies many of the regimes.

The United States and  Saudi Arabia will now want to  see a period of stability for oil  prices. It seems the ever chaotic region can now tolerate continued sectarian violence, as long  as the Saudi oil fields  are out of bounds.

OPEC conundrum and the Middle Eastern endgame

It is impossible to believe that a few years ago peak oil was the main paradigm in the oil complex. Shorting oil was unheard of and Middle Eastern leaders were throwing their money around like confetti. The oil complex has gone full circle.

OPEC is powerless and the grand traders and politicians dictate the oil  markets and the politics behind it. This is the endgame for many Middle Eastern regimes. A painful war of attrition on the battlefield and the oil field. The nuclear talks with Iran are now irrelevant as the country is hemorrhaging capital and a normalization of ties with the West will even reduce the price of oil further. With the price of oil  so low,  the larger  powers can afford to  have a multitude of proxy wars across the region,  without worrying about  the disruption of supplies. The only issues  is how  deep  are the pockets of the oil producing nations.

It is difficult to fathom how long the Iranian regime can sustain itself with 70 dollars a barrel oil. The rear guard of OPEC desperately push for higher prices, unaware that they will have to pump more to sustain their market share. The dual threat of alternative energy sources and shale oil has thrown the traditional oil complex into turmoil and destroyed the old order.

The revolutions started in the streets but ended in the boardrooms of the great trading houses and oil producers. As economists in the Middle East and the US count the costs of this war of attrition consumers reap the reward of cheaper energy prices. Yet this is a short term phenomenon. The low prices of oil can only lead to trouble in the Middle East.  A few points to consider.

• How long can Iran sustain its embargo ridden economy with massively declining revenues ?
• When will the increasingly sectarian Sunni-Shia war in the Middle East spillover ?
• How will the new  emerging oil  states like the Kurds change the oil-state dynamics ?
• How long will  Russia remain on the sidelines  of this oil war ?

The ISIS axis. Middle East's new power brokers

With the militant war raging in Northern Iraq  it seems  like the crazy plan  of containing the Syrian civil war has finally failed. The total inaction in Syria for the past 2 years has led to the training and arming of a large army of  battle hardened over zealous militants that now threaten to spillover into the rest of the region.

With Syria largely  forgotten and with no great prize  apart from a desolate wasteland the militants are moving to plan B. Even the name ISIS could have been apt for any James Bond nemesis.  Like any great movie the sequel has to have far more action, bigger explosions and involve the whole world.

ISIS is heading directly for the Iraqi  capital  and the oil fields of  Southern Iraq. ISIS's  timing is bizarrely perfect. With an America that doesn't seem to have an appetite for war and an Iran that is bending over backwards to seem nice, the vacuum in the region leads nicely to the doorstep of  Saudi Arabia.  Of course, you do not bite the hand that feeds you, so Saudi  is clearly the final  frontier for ISIS.

The only  questions that remain is will  Iran still  pretend to be nice or will ISIS wind them up enough for them to unleash their full insurgency in Iraq.  You can just imagine the fuming IRGC generals sitting  on their hands and gritting their teeth. It wasn't  a long time ago that Hezbollah and the IRGC were the most  feared insurgency in the Middle East.  Those days  have long gone.

Oh yes, there is  one more question.  The Kurds are remarkably quiet in this little war. Could there be a tacit  agreement between the Kurds  and ISIS to carve up the area.  That would  be a  formidable  force.  The Kurds are historically some of the most accomplished  and battle hardened fighters in the region. They also sit on a nice patch of oil rich land.  This is one hell of  a sequel  waiting to  happen.  And by the way , if you were thinking of  shorting oil and a nice quiet summer forget it.

OPEC: Counter hegemon or lame duck

How  many of  you  remember the imperious personality of Sheikh Yamani ? The suave Saudi Minister of Oil and powerful OPEC delegate for 25 years. There was a time  when the whole world held their breath every time OPEC met. The meetings in Vienna became such a global media spectacle that the infamous Carlos the Jackal took the OPEC ministers hostage in 1975 to  further his dubious cause.

The world has indeed changed. Even though Saudi Arabia is still  an oil powerhouse and the Straits of Hormuz still have strategic value, the emergence  of powerful  non-OPEC oil  producers and the collapse of the OPEC administered pricing system in 1986 ushered in a new era in oil pricing. The nail in the coffin for OPEC was the United States's Strategic Petroleum Reserve and the US energy self sufficiency doctrine that has emerged. This led the US to invest  heavily  in the technology to produce shale oil and alternative energy sources. The notion of Peak Oil, so  popular just a few years ago  has been banished to the scrap heap.

The  real  challenge for  OPEC is not setting oil ceilings and controlling prices. That power shifted from multinational oil companies in 1950s and 1960s and OPEC from 1973 to 1986 to the so called market. However, the international market for trading oil is a fragmented beast that involves many diverse private and public entities. This includes investment banks, hedge funds and retail investors, including private investors and high net worth individuals.

The futures markets attracts a wide range of financial players (pension funds, hedge funds, index investors, technical traders, & retail investors). Concerns that these financial players & their trading strategies could move the oil price away from the true underlying fundamentals has alarmed many governments and regulatory authorities.

With large private  oil companies and national oil companies virtually powerless to control oil prices and a world that can function with relatively high prices the OPEC countries have been happy to sit on the massive windfall and the enormous budget surpluses  that have resulted in Middle Eastern sovereign funds buying whole neighborhoods in London and Paris.

In short OPEC fell from its lofty position, as the only developing world entity that could  stand up  to  the hegemonic power of globalization, to an embarrassing quango  with very little  teeth  and firmly in the pocket of what we loosely term the market.

Even within the elite club the grand vision of the Shah of Iran in the 70s  and the war mongering Saddam in the 80s have been replaced with dithering leaders and a dilapidated and fragmented oil complex that is in need of new technology and fully  dependent on Western companies to function. Iran is the only country that has tried to run its oil industry without too  much outside influence.  But this has led it to halve its export capacity and practically eliminate any influence it had in OPEC.

Will this scenario change ?  The simple answer is no. Running a Middle Eastern country is a difficult  job, with very little job security. Qadaffi, Assad, the Shah of Iran,  and Saddam Hussein can vouch for this. Middle Eastern leaders know  the oil price will not stay this high forever. One day there will  be too many Teslas to  warrant a 110 dollar oil  price. At that stage the status quo will  remain in perpetuity and the Middle East will again become the forgotten route between East and West, the Silk Road.