Saturday, January 23, 2016

Petro-War: Iran Has Saudi Arabia Over An Oil Barrel



Iran will shortly receive about $100 billion unfrozen assets and would be able to sell an estimated 30-50 million bbls of crude stored in 25 super tankers (or VLCC Very Large Crude Carriers) each with a capacity of 2 million bbls. Although the quality of this stored oil has not been verified, there are still abundant markets worldwide for this grade. Additionally, the market has already priced in this soon to be available Iranian floating inventory as has probably assumed that the Iranians will not rush to sell this entire inventory in short order.

Because Iran is well armed financially to wreck havoc on a weakened Saudi Arabia, they will craftily use these assets to severely undermine the Kingdom.  Because the Saudis are still obsessed with maintain market share, the Iranians can undercut Saudi prices anywhere in the world while maintaining current production positioning the Saudis under the sword of Damocles.

Instead of the threat of nuclear weapons, in an ironic twist Iran is now using the nuclear agreement to unfreeze billions in assets and by de facto weaponize oil to gain market share and influence in the Middle East through trade instead of bombs. Unlike the pampered and entitled Saudi population, the Iranian population has learned to live with less under draconian sanctions for several generations so even a modest increase in the standard of living will placate the population.

As articulated in my recent article entitled Saudi Arabia on the Brink of Falling Into Economic Quick Sand which was published in the Oil & Gas Monitor magazine earlier this month, the Saudis face civil unrest with the reduction and/or elimination of subsidies such as health care, fuel, education, etc.

With respect to Iran, regardless of the type of government, any country that suddenly has a windfall of resources, hordes of cash and a plentiful fungible commodity, will wield this power in exacting revenge, real or perceived on its enemies and applying enormous influential pressure on its neighbors.

Iran can apply the same tactics as a local gangster who wants to gain market share quickly in a new territory by undercutting the established gang in pricing, even giving away the product, driving him out, and then establishing himself as the new powerhouse. Iran is doing this on an international scale. Unlike a neighborhood turf war, the Saudis will still remain however their power and influence will be greatly diminished and suffer an incalculable loss of face.  Their carefully crafted reputation will be badly tarnished and they may be forced to make politically and economically unpalatable compromises in upcoming OPEC meetings and on the international stage. Though the Saudis will continue to be a leading producer, Iran will have considerable leverage to call the shots and dictate terms. In other words Iran is hijacking the OPEC leadership from the shadows.

How will this upcoming abrupt change in dynamic impact energy prices?  In the interim you may witness a protracted economic war between these countries. Iran was engaged in a military one with Iraq during 1980-1988 resulting in untold human casualties. Iraq eventually sought peace because of diminishing manpower.

In this case Iran is better positioned to extract draconian peace terms with the Saudis because of superior economic leverage. Unlike the Saudis, the Iranian leadership is psychologically battle-hardened for a long-term slog and has experience and the will to absorb horrific losses to reach their objective.

For 2016 any coordinated efforts by OPEC to cut production are doomed because of the intense animosities between members particularly Iran and Saudi Arabia. Each are heavily involved in the economically-draining proxy wars based along sectarian lines. Iran is active in Baghdad, Damascus and Beirut while Saudi Arabia is deeply entrenched in the unwinnable and unending eight-sided Yemen conflict. Not only would OPEC members have to mutually agree to cut production, but they would also have to convince major non-OPEC countries to do the same. Russia will give a firm nyet because they are still under draconian sanctions and need all the revenue it can, including support of the Iranian-backed Assad regime, the newly (albeit forcibly) acquired Crimea.

My assessment is that Iran will utilize economic water torture in oil by selling at a steep discount just enough oil to keep prices slightly below the market rate even as demand may tick up, and keep Saudi Arabia subservient to Iran’s needs. For these reason, I believe that oil prices will remain within the $28-$35/bbl range through 2016.

This article was published in Seeking Alpha.


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