Posts Tagged ‘Crude Oil’

 

Did the doomsday clock on the petrodollar (and implicitly US hegemony) just tick one more minute closer to midnight?

Apparently confirming what President Maduro had warned following the recent US sanctions, The Wall Street Journal reports that Venezuela has officially stopped accepting US Dollars as payment for its crude oil exports.

As we previously noted, Venezuelan President Nicolas Maduro said last Thursday that Venezuela will be looking to “free” itself from the U.S. dollar next week. According to Reuters,

“Venezuela is going to implement a new system of international payments and will create a basket of currencies to free us from the dollar,” Maduro said in a multi-hour address to a new legislative “superbody.” He reportedly did not provide details of this new proposal.

Maduro hinted further that the South American country would look to using the yuan instead, among other currencies.

“If they pursue us with the dollar, we’ll use the Russian ruble, the yuan, yen, the Indian rupee, the euro,” Maduro also said.

And today, as The Wall Street Journal reports, in an effort to circumvent U.S. sanctions, Venezuela is telling oil traders that it will no longer receive or send payments in dollars, people familiar with the new policy said.

 

Oil traders who export Venezuelan crude or import oil products into the country have begun converting their invoices to euros.

The state oil company Petróleos de Venezuela SA, known as PdVSA, has told its private joint venture partners to open accounts in euros and to convert existing cash holdings into Europe’s main currency, said one project partner.

The new payment policy hasn’t been publicly announced, but Vice President Tareck El Aissami, who has been blacklisted by the U.S., said Friday, “To fight against the economic blockade there will be a basket of currencies to liberate us from the dollar.”

There is no major market reaction for now – a modest bid to Bitcoin and some weakness in EUR and Gold (seems someone wants this to look like nothing).

However, as Nomura debt analyst Siobhan Morden warns:

“You can say whatever you want for your domestic propaganda and make it look like you’re retaliating against the U.S…. This political posturing will only be to their detriment.”

So what happens if Europe also sanctions Venezuela? Will Rubles or Yuan… or Gold be the only way to buy Venezuela’s oil?

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This decision by the nation with the world’s largest proven oil reserves comes just days after China and Russia unveiled the latest Oil/Yuan/Gold triad at the latest BRICS conference.

It’s when President Putin starts talking that the BRICS reveal their true bombshell. Geopolitically and geo-economically, Putin’s emphasis is on a “fair multipolar world”, and “against protectionism and new barriers in global trade.” The message is straight to the point.

“Russia shares the BRICS countries’ concerns over the unfairness of the global financial and economic architecture, which does not give due regard to the growing weight of the emerging economies. We are ready to work together with our partners to promote international financial regulation reforms and to overcome the excessive domination of the limited number of reserve currencies.”

To overcome the excessive domination of the limited number of reserve currencies” is the politest way of stating what the BRICS have been discussing for years now; how to bypass the US dollar, as well as the petrodollar.

Beijing is ready to step up the game. Soon China will launch a crude oil futures contract priced in yuan and convertible into gold.

This means that Russia – as well as Iran, the other key node of Eurasia integration – may bypass US sanctions by trading energy in their own currencies, or in yuan.

Inbuilt in the move is a true Chinese win-win; the yuan will be fully convertible into gold on both the Shanghai and Hong Kong exchanges.

The new triad of oil, yuan and gold is actually a win-win-win. No problem at all if energy providers prefer to be paid in physical gold instead of yuan. The key message is the US dollar being bypassed.

RC – via the Russian Central Bank and the People’s Bank of China – have been developing ruble-yuan swaps for quite a while now.

Once that moves beyond the BRICS to aspiring “BRICS Plus” members and then all across the Global South, Washington’s reaction is bound to be nuclear (hopefully, not literally).

Washington’s strategic doctrine rules RC should not be allowed by any means to be preponderant along the Eurasian landmass. Yet what the BRICS have in store geo-economically does not concern only Eurasia – but the whole Global South.

Sections of the War Party in Washington bent on instrumentalizing India against China – or against RC – may be in for a rude awakening. As much as the BRICS may be currently facing varied waves of economic turmoil, the daring long-term road map, way beyond the Xiamen Declaration, is very much in place.

* * *

Having threatened China today with exclusion from SWIFT, we suspect Washington is rapidly running out of any great ally to sustain the petrodollar-driven hegemony (and implicitly its war machine). Cue the calls for a Venezuelan invasion in 3…2..1…!

CA.L- How unfortunately hilarious this is…

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Oil prices could be facing a significant jolt after Federal Chair Janet Yellen, in her annual speech at the Jackson Hole economic symposium in Wyoming, said that the case to increase interest rates had strengthened. The extent of the jolt that may be felt is far from certain however.

Due to the quotations of crude oil in U.S. dollars, there is often a bind between the fate of the greenback and the costs of oil per barrel, as the balance of oil trade and the effect on market psychology can be hugely influential.

There are, however, other significant factors in the oil price equation, including high production rates and inventories.

Spencer Welch, director of downstream energy consulting at IHS Markit explained that:

 “a rate hike would strengthen the U.S. dollar, which would make oil more expensive globally, so this would tend to reduce oil demand slightly, but it takes a while for this effect to play out, and would therefore likely reduce oil market price.”

“By how much? That depends on the size of the interest rate increase. It is likely to be less than $1/bbl in oil price impact, but that is not based on historical statistics.”

Different nations Welch believes, are effected by a rate rise in varying ways, depending if they are net exporters or importers of oil.

Importers are more likely to be hurt by a rate rise as oil would become more expensive due to a rising dollar, net exporters of oil would benefit as a result of selling oil in dollars, with the dollar being stronger.

“I would say yes, rate rise impacts are smaller compared to other oil market impacts, such as declining U.S. oil production, high oil inventories, high oil production rates in other countries, including production in Saudi Arabia, Russia, Iraq, Iran, and in the North Sea.” Spencer Welch continued.

A recent paper by Morgan Stanley highlighted that the correlation between trade weighted U.S. dollars and oil was high until May this year, when large supply outages and then product market concerns subsequently brought oil back into focus, due to the increased market anxiety.

The investment bank also points out that in July, the oil and dollar price association was disrupted by fears of product overhang, although recently there are signs that the correlation is returning.

If this relationship stays firm, then Morgan Stanley believes that this could help support oil prices in the near term. Overall the bank’s forex team sees the dollar weakening further, before resuming an upwards trajectory next year.

The paper also points to how global market factors can have a huge impact on oil prices, outweighing the influence of a rising or falling dollar, as evidenced by the influence of the upcoming OPEC meeting taking place alongside the International Energy Forum in Algiers.

Any production deal to combat oversupply in the market must engage with Iran’s conditional demands, that OPEC will have to agree to allow it to return to its pre-sanction production levels.

Morgan Stanley also said that even if the meeting is a successful one, an OPEC freeze would likely be a short term positive but a medium term negative for oil prices.

Other factors such as the United States’ burgeoning production of shale oil has also been mentioned as a game changer for the oil price and dollar relationship, as argued by Goldman Sachs’ Jeffrey Currie in a study published in 2014.

He said that in 2008 the U.S. was importing on a net basis nearly 12 million barrels per day of oil and products. Today, owing largely to shale technology, that number is less than 5 million barrels per day, disturbing the oil price and dollar correlation.

According to the United States Energy Information Administration, the volume of shale oil production peaked at 4.5 million barrels of oil per day in early 2015, before falling to 4 million a day this year.

It’s uncertain by how big a margin shale oil production has transformed the oil price and dollar relationship, as the United States remains a net importer of oil.

Russia is on track to set a new record in crude oil exports this year, and Iran is boosting exports to Europe, intensifying competition on the continent, which is a key market for both countries.

As Oilprice.com noted at the beginning of June, Russia has surprised analysts time over time by keeping oil production at near-record levels throughout the rock bottom of the oil bust.

Not only has Russia managed to keep output at high levels, it has actively increased its exports to China and has managed to maintain its market share in other key markets.

Russian Energy Ministry figures reveal a 4.9 percent increase in exports to 5.55 million barrels a day during the first half of 2016 when compared to the same period last year.

In June, the country’s output rose 1.14 percent from a year earlier, with total crude export figures on the rise during every month since summer 2014.

“If production remains steady, then it will likely be a record year for exports,” said Christopher Haines, head of oil and gas at BMI Research told Bloomberg. “This should mean competition is strong, especially with Iran sending more oil into southern Europe.”

Russia – also known as the world’s most prolific energy producer – said earlier this year that it would fund a spike in crude production after members of the Organization of Petroleum Exporting Countries (OPEC) failed to agree on a plan to reduce the existing glut in oil and gas markets.

Iran has also been increasing production as it aims to regain market share after international sanctions against it were lifted earlier this year.

The year 2012 saw Europe banning Iranian oil as a political reaction to the country’s secretive nuclear program. In the years that followed, Russian Urals crude, a blend similar to Iran’s formula, became a popular alternative.

Last year, the European Council on Foreign Relations released a report outlining new energy sources for Europe. The document called Russia an “unreliable partner” and suggested several Central European and Middle Eastern countries – including Iran and Iraq – as possible suppliers in the near future, albeit with logistical caveats.

“There are also infrastructural constraints, such as the geographical distribution of resources in Iran relative to its consumption, as well as the lack of production and export infrastructure,” it said. “Iran’s gas resources (for example, the South Pars field) are in the south. Therefore, substantial investment would be needed to bring gas to the northwest to tap into Europe’s Southern Gas Corridor.”

The European Union might be skeptical about increasing its crude supply from Russia, but China seems to be keen on receiving more Russian Crude. Russian oil exports to this part of the world have doubled year over year last April at the expense of Saudi Arabia and Iran.

One year ago, this website was the first to observe that when combined with its offshore Belgium-held holdings, China was first slowly then fast liquidating its Treasury holdings, an observation which led us to correctly predict that China would proceed to devalue its currency, which it did shortly after. Sure enough, shortly thereafter it became common knowledge that the PBOC, owner of the world’s biggest foreign-exchange reserves and largest offshore holder of US Treasuries, had burnt through 20% of its inventory since 2014, dumping about $250 billion of U.S. government debt and using the funds to support the yuan and stem capital outflows.

As it turns out, China wasn’t selling only Treasuries. According to a Bloomberg analysis when peeking deeper at the TIC data, while China’s sales of Treasuries have slowed, its holdings of U.S. equities are now showing steep declines as Beijing proceeds to liquidate a substantial portion of its US equities.

This means that in addition to oil exporting nations such as Saudi Arabia, whose liquidation of US stocks we also predicted back in 2014 when we commented on the death of the Petrodollar, the “other” big seller of US equities has been found: China’s stash of American stocks sank about $126 billion, or 38%, from the end of July through March, to $201 billion. “That far outpaces selling by investors globally in that span – total foreign ownership fell just 9 percent. Meanwhile, China’s U.S. government-bond stockpile was relatively stable, dropping roughly $26 billion, or just 2%.”

While it will come as no surprise that China is desperate to procure US dollars to keep its currency balanced as it intervenes now on a daily basis from prevent the USDCNY from soaring above 6.60 and “punish” those who are selling the Yuan, the observations confirms that China’s central bank remains under pressure to raise dollars and smooth the yuan’s depreciation. Only instead of selling Treasurys it has decided to sell stocks. “The equities reduction reminds investors that while China’s $1.4 trillion trove of Treasuries dwarfs its other foreign assets, it has accumulated enough U.S. stocks to influence global markets.”

“Selling some of its equities is a reasonable way of raising the cash needed to finance the big drawdown in reserves,” said Brad Setser, a former deputy assistant secretary for international economic analysis at the Treasury.

There is just one problem: what happens if the capital outflows persist and China runs out of US reserves to sell? Because judging by Vancouver real estate prices, and of course the relentless surge in bitcoin, China’s capital outflow is only just beginning… not to mention China’s $30 trillion in deposits, which dwarf any potential PBOC firewall.

Bloomberg also notes, that while the amount China unloaded is a sliver of the $23 trillion U.S. equity market, it’s significant when compared with holdings of other big investors. The largest American mutual fund, the Vanguard Total Stock Market Index Fund, oversees about $373 billion.

The Treasury doesn’t break down its data into private and official holdings. Yet China’s capital controls limit the candidates capable of amassing such a hoard of U.S. equities. Also, private Chinese ownership of foreign stocks remained stable in 2015, signaling that the selling originated from an official source, SAFE data on international investments indicate.

 

Given that China’s private holdings of equities abroad are smaller than the nation’s U.S. holdings as reflected in the Treasury tally, “one can reasonably infer that SAFE, whose reserve assets are not included separately in the net international investment position, holds many of the equities,” Setser said.

Why did China switch from selling bonds to stocks? There are various explanations: one is that the IMF warned China to preserve a substantial liquidity buffer above $1 trillion in holdings ahead of what may be even more volatile times. Another is that Jack Lew told China in no uncertain terms to stop selling US paper during the Shanghai Accord. Also, according to Bloomberg, “wwitching to selling stocks allows the PBOC to retain safer, more liquid assets such as Treasuries that it can unload easily in times of turmoil. Two rounds of declines in the yuan in the last 10 months spurred market volatility worldwide and led investors to monitor China’s reserves as a measure of how much of its war chest the country was burning through to combat capital flight.”

 Dumping equities may prove to be a savvy move, considering that the S&P 500 Index has gone 13 months without a new high on a closing basis. China, which more than doubled its holdings of U.S. stocks during the bull market that began in 2009, wouldn’t be alone among government-affiliated sellers of investments abroad. Sovereign funds from Qatar to the United Arab Emirates and Russia have been liquidating assets since crude began tumbling in 2014.

But a bigger question is what is the message that China is sending to the world by now liquidating stocks over bonds.

“The Chinese, or other people for that matter, are taking the view that sitting in U.S. equities is presumably quite risky, and I’m not surprised they’re shifting,” said Fredrik Nerbrand, global head of asset allocation at HSBC Bank Plc in London. “This seems like more of a generation of cash more than anything else, and probably a de-risking of their portfolio.”

The problem for the Fed is what will happen if and when everyone else decided to tag alone with China in continuing the Great Unrotation from stocks to bonds, as the last attempt by the Fed to herd investors out of bonds and into stocks fails.

What will Yellen do then?

In order to understand the hype surrounding the phenomena of Islamic radicalism and terrorism, we need to understand the prevailing global economic order and its prognosis. What the pragmatic economists have forecast about the free market capitalism has turned out to be true; whether we like it or not. A kind of global economic entropy has set into motion. The money is flowing from the area of high monetary density to the area of low monetary density.

The rise of the BRICS countries in the 21st century is the proof of this tendency. BRICS are growing economically because the labor in developing economies is cheap; labor laws and rights are virtually nonexistent; expenses on creating a safe and healthy work environment are minimal; regulatory framework is lax; expenses on environmental protection are negligible; taxes are low; and in the nutshell, windfalls for the multinational corporations are huge.

Thus, BRICS are threatening the global economic monopoly of the Western capitalist bloc: that is, North America and Western Europe. Here we need to understand the difference between the manufacturing sector and the services sector. The manufacturing sector is the backbone of the economy; one cannot create a manufacturing base overnight. It is based on hard assets: we need raw materials; production equipment; transport and power infrastructure; and last but not the least, a technically-educated labor force. It takes decades to build and sustain a manufacturing base. But the services sector, like the Western financial institutions, can be built and dismantled in a relatively short period of time.

If we take a cursory look at the economy of the Western capitalist bloc, it has still retained some of its high-tech manufacturing base, but it is losing fast to the cheaper and equally robust manufacturing base of the developing BRICS nations. Everything is made in China these days, except for hi-tech microprocessors, softwares, a few Internet giants, some pharmaceutical products, the Big Oil and the all-important military hardware and the defense production industry.

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Apart from that, the entire economy of the Western capitalist bloc is based on financial institutions: the behemoth investment banks, like JP Morgan chase, total assets $2359 billion (market capitalization: 187 billion); Citigroup, total assets $1865 billion (Market Capitalization: 141 billion); Bank of America, total assets $2210 billion (Market Capitalization: 133 billion); Wells Fargo, Goldman Sachs, BNP Paribas and Axa Group (France), Deutsche Bank and Allianz Group (Germany), Barclays and HSBC (UK).

After establishing the fact that the Western economy is mostly based on its financial services sector, we need to understand its implications. Like I said earlier, that it takes time to build a manufacturing base, but it is relatively easy to build and dismantle an economy based on financial services. What if Tamim bin Hammad Al Thani (the ruler of Qatar) decides tomorrow to withdraw his shares from Barclays and put them in some Organization of Islamic Conference-sponsored bank, in accordance with Sharia?

What if all the sheikhs of Gulf countries withdraw their petro-dollars from the Western financial institutions; can the fragile financial services based Western economies sustain such a loss of investments? In April this year the Saudi finance minister threatened that the Saudi kingdom would sell up to $750 billion in Treasury securities and other assets if Congress passed a bill that would allow the Saudi government to be held responsible for any role in the September 11, 2001 terror attacks. And $750 billion is only the Saudi investment in the US, if we add its investment in Western Europe, and the investments of UAE, Kuwait and Qatar in the Western economies, the sum total would amount to trillions of dollars of Gulf’s investment in the US and Western Europe.

Notwithstanding, we need to look for comparative advantages and disadvantages here. If the vulnerable economy is their biggest weakness, what are the biggest strengths of the Western powers? The biggest strength of the Western capitalist bloc is its military might. We have to give credit to the Western hawks they did which nobody else in the world had the courage to do: that is, they privatized their defense production industry. And as we know, that privately-owned enterprises are more innovative, efficient and in this particular case, lethal. But having power is one thing, and using that power to achieve certain desirable goals is another.

The Western liberal democracies are not autocracies; they are answerable to their electorates for their deeds and misdeeds. And much to the dismay of pragmatic, Machiavellian ruling elites, the ordinary citizens just can’t get over their antediluvian moral prejudices. In order to overcome this ethical dilemma, the Western political establishments wanted a moral pretext to do what they wanted to do on pragmatic, economic grounds. That’s when 9/11 took place: a blessing in disguise for the Western political establishments, because the pretext of “war on terror” gave them carte blanche powers to invade and occupy any oil-rich country in the Middle East and North Africa region.

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No wonder then that the first casualty of “war on terror” after Afghanistan had been Iraq; and what did the corporate media tell us about invading Iraq back in 2003? Saddam’s weapons of mass “deception” and his purported links with al Qaeda? It is only a coincidence that Iraq holds 140 billion barrels of proven crude oil reserves and produces more than 3 million barrels per day of crude oil.

Then again what did the Western mainstream media tell us about the Libyan so-called “humanitarian intervention” in 2011? Peaceful and democratic protests by the supposedly “moderate and secular” Libyans against the Qaddafi regime and the Western responsibility to protect the supposedly democratic revolutions and civilian lives? Once again it is only a coincidence that Libya holds 48 billion barrels of proven oil reserves and produces 1.6 million barrels per day of most easily extractable crude.

Fact of the matter is that monopoly capitalism and global neo-colonial economic and political order are the real issues, while Islamic radicalism and terrorism are the secondary issues and itself a byproduct of the former. That’s how the mainstream media constructs artificial narratives and dupes its audience into believing them: during the Cold War it created “the Red Scare” and told its audience that communism is an existential threat to the free world and the Western way of life; the mainstream media’s naïve audience bought this narrative.

Then the Western powers and their Saudi and Pakistani collaborators financed, trained, armed and internationally legitimized the Afghan “freedom fighters” and used them as proxies against the Soviet Union.

After the dissolution of the Soviet Union they declared the former “freedom fighters” to be terrorists and another existential threat to the free world and the Western way of life. The audience of the corporate media again bought this narrative.

Then again, during the Libyan and Syrian civil wars the former “terrorists” once again became freedom fighters – albeit in a more nuanced manner, this time around the corporate media sells them as “moderate rebels.” How on earth could you label a militant holding a gun in his hands as “moderate and peaceful?”

The way I see it, Islamic State, like its predecessor, al Qaeda, is also a hobgoblin to create an atmosphere of fear in order to justify an interventionist policy in the energy-rich Middle East. Islamic State in Iraq and Syria is quite different from its so-called affiliates in remote and disparate regions such as Libya and Sinai.

Only thing that differentiates Islamic State from other ragtag jihadist outfits is its sophisticated weapons arsenal that has been provided to it by NATO and bankrolled by the Gulf Arab states during the Syrian proxy war; another factor that gives a comparative advantage to Islamic State over other jihadist outfits is its top and mid-tier command structure, which is comprised of professional, ex-Baathist military and intelligence officers from Saddam era.

Any militant outfit that lacks Islamic State’s weapons arsenal and its professional command structure cannot claim to be affiliated with it merely on the basis of ideological affinity without any organizational and operational link. Moreover, Islamic State is not a terror outfit like al Qaeda; it has overrun one-third of Syria and Iraq, therefore, it’s an insurgent organization.

In order to sustain their crumbling “war on terror” narrative, the Western powers now make a distinction between “the green, yellow and red terrorists” – green militants, like the Free Syria Army, whom the NATO overtly supports; yellow jihadists, such as the Army of Conquest that includes the Saudi-supported, hardline Islamists like Ahrar al-Sham and the al-Qaeda-affiliate al-Nusra Front, whom the NATO covertly supports; and the red terrorists like the Islamic State which is a by-product of the hypocritical Western policy in Syria and Iraq.

Photo taken in Benghazi, Libya, in February 2016

Photo taken in Benghazi, Libya, in February 2016

In the last 15 years of the so-called “war on terror” the Western powers have toppled only a single Islamist regime of Taliban in Afghanistan and three Arab nationalist regimes — Saddam’s Baathist regime in Iraq, Qaddafi’s Afro-Arab nationalist regime in Libya and they are now desperately trying to oust another anti-Zionist, Baathist regime of Bashar al-Assad in Syria.

Some of the high-ranking American and British security officials, like Dennis Blair of NSA, Eliza Manningham-Buller of MI-5 and Alastair Crooke of MI-6, have conceded on the record that bringing down the possibility of incidents of terrorism to a zero-level in a highly militarized world is simply not an option.

Terrorism is only a crime, a heinous crime but a crime, nevertheless; it is not an act of war. Those who treat it like an act of war have ulterior motives. It is the job of the law enforcement and intelligence agencies to prevent and minimize such incidents from taking place, however, as the above mentioned security specialists have stated in their reports that just like any other crime the incidents of terrorism can be brought down significantly by implementing prudent and long-term security and foreign policies, but complete elimination of terrorism is simply not a possibility.

Crimes like murders, thefts, robberies and rapes do occur in all societies; in the ideal, prosperous and peaceful societies the rate of such crimes is low, while in the impoverished and conflict-ridden societies the rate of such crimes is high. But there will always be criminals like Anders Breivik and Seung-Hui Cho of Virginia Tech massacre-fame who would unleash a reign of terror in any given society.

Notwithstanding, the phenomena of militancy and insurgency has less to do with religious extremism, as such, and more with the weak writ of the state in the rural and tribal areas of the developing countries, which has further been exacerbated by the deliberate weaponization of certain militant groups by the regional and global players.

The Maoist insurgency in India, for instance, has claimed 2,866 fatalities since 2010; and they are Hindus, not Muslims. Whether it’s Islamist or Maoist radicals, such insurgencies are only the reactions to wealth disparity and uneven development that has mostly been limited to the urban centers while the rural hinterland languishes in abject poverty, and the law enforcement and the state’s security apparatus does not has a presence in the insurgency-prone areas.

The root factors that have primarily been responsible for spawning militancy and insurgency anywhere in the world is not religion but socio-economics, ethnic diversity, marginalization of the disenfranchised ethno-linguistic and ethno-religious groups and the ensuing conflicts; socio-cultural backwardness of the affected regions, and the weak central control of the impoverished developing states over their territory.

After invading and occupying Afghanistan and Iraq, and when the American “nation-building” projects failed in those hapless countries, the US’ policy-makers immediately realized that they were facing large-scale and popularly-rooted insurgencies against the foreign occupation, consequently, the occupying military altered its CT (counter-terrorism) doctrines in the favor of a COIN (counter-insurgency) strategy. A COIN strategy is essentially different from a CT approach and it also involves dialogue, negotiations and political settlements, alongside the coercive tactics of law enforcement and military and paramilitary operations on a limited scale.

All the regional militant groups like the Taliban, Islamic State, al Shabaab in Somalia and Boko Haram in Nigeria; and even some of the ideological affiliates of al Qaeda and Islamic State, like AQAP, AQIM, Islamic State in Afghanistan, Yemen and Libya, which have no organizational and operational association with al Qaeda Central or the Islamic State of Iraq and Syria, respectively, are not terror groups, as such, but Islamist insurgents whose cherished goal is the enforcement of Shari’a in the areas of their influence, like their progenitor, the Salafist State of Saudi Arabia.

Saudi Arabia's risky oil game

Saudi Arabia’s risky oil game

Finally, I fail to see the reason why the Western powers have been blowing the Islamist insurgencies in the Middle East out of proportions, which have been but the consequence of their own ill-conceived wars in Afghanistan, Iraq, Libya, Yemen, Somalia and Syria? What is it that the insurgents want and the so-called “liberal interventionists” cannot accept as a matter of principle? Is it the enforcement of Shari’a, or the barbaric Hudood-style executions that have earned the Taliban, Islamic State, al Shabaab and Boko Haram the odium of the international community? If that is the case, then why do the Western powers overlook the excesses committed by Saudi Arabia where Shari’a is the law of the land and Hudood-style executions are an everyday occurrence?

This contradiction speaks volumes about the sheer hypocrisy and double standards of the Western powers: that, when it comes to securing 265 billion barrels of Saudi oil reserves and 100 billion barrels, each, of UAE and Kuwait that together constitutes 465 billion barrels, i.e. one-third of the world’s proven crude oil reserves, they are willing to overlook the excesses that have been committed by such Medieval regimes but when it comes to negotiating with the Islamist insurgents to reach political settlements and to let up on all the violence and spilling of blood in the region, they stand firm against the so-called “terrorists” as a matter of principle.

 

The OPEC meeting is only a week away, but the chances of a positive result are as remote as ever. Rising oil prices, the heightened rivalry between Saudi Arabia and Iran, and Saudi Arabia’s willingness to go it alone will make a deal all but impossible.

First of all, Iran is not in a cooperative mood. According to the IEA, Iran has managed to boost oil production to 3.56 million barrels per day in April, its highest level since November 2011. Oil exports also jumped 600,000 barrels per day to 2 million barrels per day. Importantly, Iran’s output now stands at pre-sanctions levels, a key threshold that the Iranian government says it needs to reach before it would consider any cooperation on production limits with OPEC. However, Iran thus far does not see it that way, insisting that it still has more ground to make up.

More importantly, however, is Saudi Arabia’s shift in attitude. In a once unthinkable development, Saudi Arabia is backing away from OPEC. The cartel’s largest, most important, and most influential member will leave the group rudderless. Countless obituaries have been written about OPEC since November 2014, but the new direction that the Saudi monarchy is heading in all but ensures diminished influence for the oil cartel.

Saudi Arabia’s spurning of OPEC has been building for some time. In November 2014 it abandoned any plans to limit production in order to prop up prices, a strategy to pursue market share that has led to some downsides, but has largely achieved its goals. Saudi Arabia has seen revenues plummet, but it is producing at record levels and outlasting rival producers. U.S. shale, for instance, is down about 1 million barrels per day (mb/d) from the April 2015 peak, and more than 70 North American drillers have gone bankrupt.

But Saudi Arabia has gone further to distance itself from OPEC. In April, Saudi Arabia scuttled the production freeze deal in Doha, killing what would have been only a modest agreement that put limits on oil output. By all accounts, the emergence of the young Deputy Crown Prince Mohammed bin Salman led to a harder line from Saudi Arabia. The replacement of long-time oil minister Ali al-Naimi a few weeks later solidified perceptions of a new era in Saudi Arabia. The Saudi government has very little inclination to limit its output just as its strategy is bearing fruit, and even less of a willingness to work with Iran, its regional rival, who it is battling in proxy wars in Yemen and Syria. Saudi Arabia is going it alone and oil production is now close to record levels, above 10.2 mb/d.

Crucial to Saudi Arabia’s downgrading of OPEC on its list of priorities is its ambitious project to transition the country away from an overwhelming dependence on oil sales. The “Vision 2030” economic plan will involve the partial privatization of Saudi Aramco, with proceeds to be invested in a $2 trillion sovereign wealth fund, which in turn will make strategic investments in non-oil assets. If it IPO goes forward, Saudi Arabia, one of the world’s largest oil producers and still the most important player in OPEC, will be the only OPEC member without a fully state-owned oil company.

Saudi Arabia’s decision to walk away from Doha, combined with the colossal economic reforms it is putting in place, all but assure that it no longer cares about cooperating with OPEC members to influence market prices for crude oil.

“The main take-away from Saudi Vision 2030 is that there’s just no role for OPEC,” Seth Kleinman, head of European energy research at Citigroup Inc., told Bloomberg in a recent interview. “Or, you can have an OPEC without Saudi Arabia, which just isn’t much of an OPEC.” Given that Saudi Arabia is the only country with significant spare capacity, which is what allows it to ramp up and down oil production, OPEC is more or less meaningless without its largest producer.

Moreover, even if Saudi Arabia was not embarking on this epochal change in the structure of its economy, there is little reason for OPEC to limit production at its upcoming meeting in Vienna. Oil prices are finally rebounding, up more than 80 percent from the February lows. Outages in supply from Canada to Nigeria have tightened markets. U.S. production is down 1 mb/d and will continue to fall for the foreseeable future. And even oil inventories appear to be leveling off.

“I don’t think OPEC will decide anything,” a source from a major oil producer in the Middle East told Reuters. “The market is recovering because of supply disruptions and demand recovery.” An OPEC delegate told Reuters that any changes to the cartel’s policy is off the table. “Nothing. The freeze is finished,” the OPEC source said.

 

Back in November, when the world-record crude inventory glut was still in its early innings, we showed what we then thought was a disturbing image of dozens of oil tankers on anchor near the US oil hub of Galveston, TX, unwilling to unload their cargo at what the owners of the oil thought was too low prices.

Little did we know that just a few months later this seemingly unprecedented sight of clustered VLCCs would be a daily occurrence as oil producers, concerned by Cushing hitting its operating capacity, would take advantage of oil curve contango to store their oil offshore indefinitely.

However, while the “parking lot” off Galveston has since normalized, something shocking has emerged and continued to grow half way around the world, just off the coat of Singapore. This.

 

The red dots show ships either at anchor or barely moving, either oil tankers or cargo, which have made the Straits of Malacca, one of the world’s most important shipping lanes which carries about a quarter of all seaborne oil primarily from the Persian Gulf headed to China, into a “bumper to bumper” parking lots of ships with tens of millions of barrels in combustible cargo.

it is also the topic of the latest Reuters expose on the historic physical crude oil glut which continues to build behind the scenes, and which so far has proven totally immune to dissipation as a result of the sharp increase in oil prices over the past three months.

Indeed, as Reuters notes, prices for oil futures have jumped by almost a quarter since April, lifted by severe supply disruptions caused by triggers such as Canadian wildfires, acts of sabotage in Nigeria, and civil war in Libya. And yet flying into Singapore, the oil trading hub for the world’s biggest consumer region, Asia, reveals another picture: that a global glut that pulled down prices by over 70 percent between 2014 and early 2016 is nowhere near over, and that financial traders betting on higher crude oil futures may be in for a surprise from the physical market.

“I’ve been coming to Singapore once a year for the last 15 years, and flying in I have never seen the waters so full of idle tankers,” said a senior European oil trader a day after arriving in the city-state.

As Asia’s main physical oil trading hub, the number of parked tankers sitting off Singapore’s coast or in nearby Malaysian waters is seen by many as a gauge of the industry’s health.  Judging by this, oil markets are still sickly: a fleet of 40 supertankers is currently anchored in the region’s coastal waters for use as floating storage facilities.

The glut is not only constant but is rising with every passing week: the tankers are filled with 47.7 million barrels of oil, mostly crude, up 10 percent from the previous week, according to newly collected freight data in Thomson Reuters Eikon.

What is curious is that the glut is persisting despite seemingly relentless demand by China. Earlier today Bloomberg calculated that 74 VLCCs are bound for China, the highest in 3 weeks, and up from 69 a week earlier. Still the inert glut off Singapore is enough oil to satisfy five working days of Chinese demand, suggesting recent supply disruptions – which have mostly occurred in the Americas, Africa and Europe – have done little to tighten supply in Asia as Middle East producers keep output near record volumes in a bid to win market share.

“The volumes of oil stored at sea in South East Asia – predominantly Singapore and Malaysia – appear to have increased significantly,” said Erik Broekhuizen, Global Manager of tanker research and consultancy at New York-based shipping brokerage Poten & Partners. “The current volumes are the highest for at least the last five years.”

What is taking place in the oil market appears to be merely the latest disconnect between the paper and physical markets, something quite familiar to precious metals traders in recent years. As Reuters notes, many participants in the physical market dispute recent notes from financial players like Goldman Sachs that forecast a further rise in crude futures. “There has been quite a bit of bullishness from hedge funds in recent months, betting on higher oil prices, and even the analysts at Goldman Sachs have recently turned more bullish on oil prices,” said Ralph Leszczynski, head of research at ship broker Banchero Costa.

“Prices are unlikely to rise too much as the specter of glut is still there,” he said. However, Leszczynski may be discounting just how powerful algo-driven momentum can be if, or especially when, it is completely disconnected from fundamentals.

* * *

While the sight of tankers at anchor is nothing new, this time something has changed.

Unlike before, when the contango of the oil curve made storing oil offshore profitable, this is no longer the case as contago-funded offshore profits have all but disappeared.

As a reminder, storing oil on ships can be profitable when prices for future delivery of crude are higher than in spot market, a term structure known as contango, as long as future prices are high enough to offset tanker charter costs. However, with the one-year contango for Brent futures collapsing from $7.60 per barrel in January to just $4, far below the $10 that traders say is currently required to make floating storage financially attractive, suddenly parking oil offshore leads to storage losses. The same goes for WTI.

At a charter cost of more than $40,000 a day for a Very Large Crude Carrier (VLCC) that can store 2 million barrels, the contango is nowhere near steep enough to make it profitable to store oil on tankers for sale at a later date.

 

This has led to a dramatic development in the oil market: debt-funded storage. Reuters writes that the need to store oil is so strong that traders are calling up banks to finance storage charters despite there being no profit in keeping fuel in tankers at current rates.

“We are receiving unusually high amounts of queries to finance storage charters,” said a senior oil trade financier with a major bank in Asia. “These queries come from traders fully aware that they will not make a profit from storing the oil. This isn’t a trade play, it’s the oil market looking for places to store unsold fuel,” he added.

So why are the traders doing this?

Simple: they hope that oil prices will rise fast and soon enough where the capital appreciation in crude will more than make up for the incurrence of new debt which will be repaid with proceeds from “selling higher.” The risk, of course, is that oil does not rise and should prices tumble, traders will not only have a capital loss on their hands, but be forced to deal with the excess leverage they had hoped would promptly disappear.

To be sure, while we have warned in the past about the danger of offshore storage becoming unprofitable and being brought back onto the land market, in the process launching a liquidation dumping scramble, it has never been this bad. A trade financier at a European bank said there had been a “spike in interest from oil traders to finance their storage needs” since the start of the year as onshore facilities were almost full.

Still, with record amounts of oil stored offshore and with the profit on such storage now shifting into a loss, many are scratching their heads how much longer this imbalanced, and bank funded, situation can persist.

“Floating storage is unattractive economically, given the current term structure in crude futures,” BMI Research said this week. Despite this, BMI said that “the volume of crude in floating storage has risen sharply in recent months,” adding that the phenomenon was global, with floating storage up 19.5 percent between the first quarters of 2015 and 2016.

“There is clearly still far too much physical crude going around for the glut to be over,” said the European oil trader after flying in to Singapore.

The trader’s conclusion: “And the paper market seems blissfully unaware of it.”

He is right… for now. Because all that will take for even the algos to give up their relentless upward momentum, is for some of these tens of millions of barrels to finally come onshore, which now that contango is no longer profitable, is just a matter of time.

In the meantime, just keep track of the unprecedented parking lot of ships off the coast of Singapore: the larger it gets, the more violent the price drop will be once banks say “no more” to funding money losing charters.