commodities

The Putin-Trump Oil Bonanza

Oil refinery – Kuwait

The Hand that Pumps the Oil

There was a time that a barrel of West Texas crude sold for over $200 a barrel. Then came the post-meltdown plunge to below 100. In 2014, oil once again embarked upon a downward quest towards less than $20. The West had just clamped down on Russian exports following the Crimean annexation, and war broke out between Saudi Arabia and Iran upon the fields of Yemen. Not wanting to lose its market share, Saudi Arabia keeps on pumping in spite of a growing oil surplus.

Now, there’s a new sheriff in town, he wants to raise prices and start selling, and he’s just closed the deal of a lifetime with the US, by installing his own personal favorite as US Secretary of State.
Prices are on the up, and it’s useful to understand just how that happened.

ISIS forces on the march in Iraq

Russia, the US & Syria:
An Oily Sequence of Events

One would have expected oil prices to drop, even a little, as the fight against ISIS in Syria winds down and Russia begins to exert its influence in the Middle East. After all, the region is known for the political instability that drives oil prices up. The price drop hasn’t occurred, and the prime reason is that – if anything – Russia would prefer to exert its influence in the US, as well, and to put prices back up for a commodity it needs to sell.

That, of course, might downgrade the already ailing Chinese economy and – in the consequent chain reaction – a large part of the China-trading world (Australia, Europe, the US, Africa….). But the last thing on Russia’s mind is the resilience of the Chinese economy. It has enough problems of its own, and any political or military undertaking it embarks upon targets those problems – not anybody else’s.

With 50% of its national income derived from oil, Russia can’t afford to let the current situation continue: it has to act, and it has to act before the entire nation is bankrupt.

To glimpse upon the background to those problems, let’s begin by mentioning that the Russian oil-producing region (the Caspian states, primarily) holds oil reserves that easily compare to those of Saudi Arabia. The only difference is that, due to Ukrainian-related sanctions, Russia cannot ship its oil out to market, while the US’s Saudi darling (in spite of its human rights abuses) can. And so, until Trump’s new Secretary of State, Exxon CEO Rex Tillerson gets those sanctions removed, Russia has been very busy taming the competition, primarily the Arabian oil-producing nations.

Russia – Forced Into Aggression

Russia’s history in the Middle East begins with wars against Persia and the Ottoman Empire over the centuries. It gained the spotlight during the Cold War when it backed military regimes in Egypt, Syria, Iraq, Libya and South Yemen. The foes at the time were the US-backed Arab monarchies and Israel. But Russia’s influence waned with the collapse of the Soviet Union. This is changing, thanks to the weapons industry, in which Russia has doubled Middle Eastern sales during the past decade under the disengaged eyes of Barak Obama et al.

Oil wells – Azerbaijan

But it is oil that is Russia’s main source for economic survival. The country boasts one of the first oil wells and refineries in the world (1745), and by 1861 the Baku refinery was producing 90% of the world’s oil.

Before 2014, at which point sanctions were put in place, the liquid gold accounted for 50% of the nation’s revenue. Since then, fracking, natural gas and sanctions have brought about the bankruptcy of 160 oil companies around the world in the past year alone; and Russia’s inability to export its oil has left the economy in tatters. At present, the ruble’s value is a third of what it was 2 years ago.

Putin’s position has become so desperate that he has been interfering unchallenged in what was once considered under US strategic influence – the Gulf. In a single month since the defeat of ISIS in Syria began, it was Russia that brokered the OPEC production freeze deal – the first in fifteen years. In addition, at the same time his planes were attacking Qatari rebels in Aleppo, he secured a $5 billion Qatari investment in the Russian national oil company, Rosneft – selling the emirate (which also backs Chechen rebels) a 20% stake in his company. And his next target is Libya, where Russia lost contracts worth about $4 billion with the collapse of the Gadhafi regime.

US involvement in the Middle East has been a series of miscalculations – beginning with the Iranian coup of 1953, through its misguided support for the Taliban, and ending in the current hands-off approach, which has left the region and its resources in the hands of others.

The US Drops the Ball

Resistance to the Russians has mostly been dampened by the ill-fated ventures of the US over the years. These have included the CIA overthrow of the democratically elected Iranian Prime Minister Mohammad Mosaddegh in 1953 (in retaliation for the nationalization of British oil reserves). As the millennium turned, Enron was funding Bin Laden and the Taliban to the tune of billions of dollars. This was orchestrated as an attempt to remove Russian influence from Central Asian oilfields. But when the Taliban – which the US considered a source of stability in Central Asia – refused to accept US plans to build a trans-Afghan pipeline, US negotiators reportedly threatened to “bury them under a carpet of bombs” (quoted in Bin Laden, la verite interdite, by J. Brisard & G. Dasquie).

The Russians over the years have been only slightly less ineffectual. But now, with his plans under full steam, it is time for Putin to mollify his greatest opponent – the US. And how better to do that by making them a partner in his oily schemes.

The Vladi-Rex Pact

In 2012, soon-to-be Secretary of State Tillerson received the Order of Friendship from the Russian government. Tillerson has never had a job in his life except at Exxon, where he began as an engineer in 1975 and rose to the rank of Chief Executive Officer in 2006. At present, his company, Exxon, is vying for drilling rights in the Arctic, where oil reserves are valued at anywhere between half and one trillion US dollars (more than 12 times the value of Rosneft in total!).

With US acquiescence at his back, Putin can dictate his terms to oil producers everywhere – including Iran and Saudi Arabia, and including the recent production freeze.

As long as sanctions against Russia are in place, this deal remains worthless. As Secretary of State, Tillerson stands an excellent chance of removing the Paris Agreement, which a growing number of EU states are also finding a hindrance. This would enable a renewal of Russian oil exports and a replenishing of the public coffers – bombed Syrian refugees or not, conquered Ukrainian villages or not, and a threatened Baltic states region notwithstanding.

And once that is attained, threatening a bankrupt Saudi Arabia into production-quota submission with a “no more weapons to fight Iran” threat, or overshooting Iranian nuclear targets and accidentally hitting that state’s oil fields can be achieved by the Putin-Trump alliance with little difficulty.

Keeping a Tab on Oil

Oil, to be politically beneficial, must be priced low enough to remain an engine for development and a viable product to buy. Too low, though, and once oil-rich nations become beggars for World Bank loans, as Saudi Arabia did earlier this year. Above that, alternative sources are developed and the downward pressure only increases. However, it must be priced as high as possible to maximize profits for producers, even if that means monopolizing or price fixing.

Clearly, oil can be expected to rise from within its current price region. Also, clearly, too high a price and fracking will return, alongside wind turbines, solar cells and more. This will probably motivate producers to keep prices well below the previous post-100 highs.

For now, the 45-53 range is holding up rather well, with price clearing $55 for a barrel of West Texas Crude perhaps providing a breakthrough towards the next resistance region between 60 and 70 dollars a barrel.

Meanwhile, online traders have been making a fortune by trading the band – buying and selling on rather dependable support and resistance levels, respectively. It’s certainly not one of the most complex strategy, but who needs complex when you can be making money?

 

 

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1 Comment

  1. January 13, 2017 at 11:03 pm — Reply

    And to think I was going to talk to sonmeoe in person about this.

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