Opec: why Trump has Saudi Arabia over a barrel

David Sheppard and Ed Crooks in The FT

Reneé Earls has lived her whole life in west Texas, and watched oil booms come and go, but she has never seen anything like the buzz of activity in the industry today. “We are a hopping spot,” she says. “If you’re not working here, that’s because you’re not looking for a job, or you are unemployable . . . If you have a skill and want to work, you can name your price.” 

Ms Earls is chief executive of the chamber of commerce in Odessa, in the heart of the Permian basin, the shale formation stretching from west Texas into New Mexico that is the red-hot centre of the latest US oil boom. Production in the region rose by 1m barrels a day in the year to August, contributing to a record-breaking 2.1m b/d increase in US output that has made the country the world’s largest crude producer. 

The shale boom has not only transformed once rundown towns deep in the west Texas desert; it is increasingly reshaping the landscape of international politics. The emergence of the US as a born-again energy superpower — one of the key factors in the recent fall in oil prices — has led politicians in Washington to weigh how it might reshape some of its oldest alliances, raising uncomfortable questions for the oil producers of the Middle East .  

For Saudi Arabia, the US’s chief ally in the Arab world, the past two months have delivered a stark lesson in how its relationship with Washington has been redefined by the Texas oil revolution. 

On Thursday and Friday ministers from Opec, the oil cartel that controls roughly a third of global production, and its allies including Russia and Kazakhstan, will meet in Vienna to decide how to respond to the 30 per cent plunge in oil prices to around $60 a barrel over the past two months. With US output surging, and Russia and Saudi Arabia also producing at close to record levels, traders are convinced the market will be awash with oil next year. 

Previously such a fall would have prompted Opec and its allies to agree to cut production. But for Saudi Arabia, which remains the world’s top oil exporter and the cartel’s de facto leader, that decision has been complicated by the murder of Jamal Khashoggi. 

The gruesome killing of the Saudi Arabian journalist and Washington Post columnist, a critic of the royal family, has revealed fissures in its prized relationship with the US. 

US president Donald Trump has maintained his backing for Riyadh and Crown Prince Mohammed bin Salman, the country’s day-to-day ruler widely known as MBS, despite reports that the CIA has concluded that he ordered the operation against Khashoggi at the kingdom’s consulate in Istanbul. But his stance comes with conditions attached, one of which lies at the heart of the kingdom’s wellbeing: the oil price. 

In statements, tweets and private communications Mr Trump has made clear his support for lower oil prices and his opposition to Riyadh moving to cut production, heaping pressure on a royal court shaken by the international backlash against the Khashoggi killing. The pressure from the White House has come despite Saudi Arabia raising production this summer to help make sure the market remained well supplied as the US reimposed sanctions on Iran. Riyadh’s position as Tehran’s chief rival in the region reflects a core part of the Trump administration’s foreign policy. 

“The priority for Saudi Arabia is shoring up MBS’s position, and the key part of that is securing Trump’s backing,” says Derek Brower, a director of RS Energy Group. “Trump has clearly linked his support for MBS with several things . . . but it’s oil that seems to be at the top of his agenda.” 

For the Trump administration, the calculation is straightforward. Lower oil prices mean cheaper petrol, providing a boost for consumers. The president has hailed the recent fall in prices as a “tax cut”, giving him some good news after a stock market wobble triggered by his confrontation with China over trade. 

For Saudi Arabia, that creates a dilemma. Khalid al-Falih, its energy minister, has pushed ahead with plans to drum up support for cutting oil production by more than 1m b/d, but observers think he will be constrained by the need to appease Mr Trump. 

Bob McNally, a consultant who has advised US administrations on oil policy, says Riyadh’s position is precarious. “If they orchestrate a high-profile Opec-plus cut that boosts Brent crude back up towards $70 they risk Trump’s wrath,” he says. “[But] if Riyadh bends entirely to Trump’s will and keeps production at record levels, an inventory glut will return and the bottom will fall out of crude prices.” 

Ellen Wald, author of a history of Saudi Arabia’s oil industry, says the “ultimate success” for Riyadh from this week’s meeting would be “to quietly let people know that a cut is happening to raise the price, without drawing attention to the activity of Opec specifically.” 

Yet history suggests that kind of mixed message risks pleasing no one — angering Mr Trump while not doing much to raise prices. 

The stakes for Saudi Arabia are higher than just a single decision on output. Its alliance with the US has long been underpinned by oil supplies, with the resultant petrodollars recycled back into the American economy through the purchase of military hardware. 

After a fall in prices in 2014, Riyadh renewed its attempts to diversify and modernise both its economy and wider society, aiming to reduce its dependence on oil revenues. But for the programme to have a chance of success, Saudi Arabia needs a higher oil price in the short term to help fund the changes. 

The shale boom is eroding the foundations of one of the pillars of the alliance. US net oil imports, which peaked at about 13m b/d in 2005, have dropped to about 2.4m b/d this year. By the end of next year, they could be running at just 330,000 b/d, according to the US Energy Information Administration. 

Saudi Arabia’s crude supplies remain crucial to the world economy, and to US consumer fuel prices. But Amy Myers Jaffe, a senior fellow at the Council on Foreign Relations, says the US economy is much less vulnerable to a spike in prices than it was even a decade ago. 

The evidence of the crude price fall four years ago and subsequent recovery is that the impact of changes on the American economy is now roughly neutral. “The US is not in the position it was in 2007-08, when we were facing a rising oil price that put strain on the current account deficit and the dollar,” she says. “That’s a big change.” 

As politicians start to grasp the implications of that shift, it is strengthening the argument that the US no longer needs to shackle itself to Riyadh. 

“The atmosphere in Washington has certainly changed following the killing of Jamal Khashoggi,” says Helima Croft, a former CIA analyst who now runs RBC Capital Markets’ natural resources analysis. “Politicians see the surge in US oil production and are wondering aloud whether the alliance is as necessary as it once was.” 

Those questions are also starting to drive activity in Congress. Last week, the Senate voted 63-37 to advance a resolution demanding that the president end US armed forces’ activity “in or affecting Yemen”, where Saudi Arabia’s war against Iran-aligned Houthi rebels has exacerbated what aid groups describe as the world’s worst humanitarian crisis. 

Legislation that would allow the US to impose criminal penalties on members of Opec and their allies for acting as a cartel has also been making progress. For Saudi Arabia, which has extensive assets in the US including the largest refinery in North America, that legislation is a genuine threat. 

Tim Kaine, the Democratic senator from Virginia who was a co-sponsor of the bipartisan legislation on Yemen, suggested the Khashoggi death had been the last straw for some. “It was really important for the Senate to send a message to Saudi Arabia: ‘you do not have a free pass’,” Mr Kaine told National Public Radio last week. “The president’s signal of complete impunity is not in accord with American values.” 

In the autumn of 2014, the Saudi government tried to reassert its authority in the oil market against the nascent threat from shale. As a global glut of crude swelled up, Riyadh declined to cut production, in the belief it could drown the Texas producers in a sea of cheap oil. 

But shale proved far more resilient than Saudi Arabia — the only country with significant spare production capacity — had hoped. Two years on Opec members returned to restricting output, with the help of Russia and other non-member producers, to lay the foundations for a recovery in prices. 

As the oil price has fallen this autumn, the memories of that episode have been resurfacing. But Jason Bordoff of Columbia University’s Center on Global Energy Policy says there is at least one crucial difference. “We now know how resilient shale can be. We saw how companies could cut costs and become more efficient to keep producing. That complicates Opec’s decision-making,” he says. “This time around, Opec knows it can’t kill shale, but maybe just wound it.” 

Ms Earls says the people of Odessa have been watching as oil prices have plunged in the past two months. Fundamentally, though, they “still feel very confident”, she adds, because of the producers’ long-term commitment. The Permian Strategic Partnership, an industry-backed group that works with communities to help develop badly-needed infrastructure including roads, houses and schools, estimates a further 60,000 jobs will be createdby 2025, a huge increase for an area that had a population of about 330,000 last year. 

The rate at which new wells are brought into production in the Permian was already expected to slow, in part because of a shortage of pipeline capacity. If the fall in prices is sustained, it could mean the industry slows further across the US, raising questions too for the White House. 

The gains to consumers from lower fuel prices will be offset by the hit to investment. The oil-dependent economies of Texas and North Dakota would bear the brunt of the hit, but it would also extend to other industries such as steelmaking, which has benefited from the boom in pipeline construction. 

Bernadette Johnson, vice-president of market intelligence at Drillinginfo, a research group, says there are several oil producing regions, such as the Denver-Julesburg Basin of Colorado, Wyoming and Nebraska, where a fall in US crude from $60 to $50 would make a significant difference to the economics. 

“The companies think that it may just be a temporary thing, and that prices will rebound,” she says. “If the oil price stays where it is, we will see companies start to react.” 

Yet while there may be a temporary slowdown, there is a general confidence in the US industry that its growth can continue. US officials say they are not concerned about the impact of lower oil prices, arguing that the industry will be able to continue to grow thanks to technological improvements and efficiency gains. Others are more sceptical, noting that US production contracted in 2016 when prices were at their nadir. 

Will Giraud, executive vice-president of Concho Resources, one of the leading producers in the Permian Basin — where production is approaching 3.7m b/d — told investors last month: “I think there are several more years of very high growth, and it’s likely that the Permian gets into the 5m-6m or maybe even 7m b/d of production and then sustains that for a decent period.” 

In the face of rampant US shale output, Saudi Arabia looks like it may still decide that angering Mr Trump is a price worth paying for a production cut that props up the oil price, whatever the heightened risks from the Khashoggi affair. But regardless of what the Saudis decide, the flow of oil from places such as Odessa will keep quietly eroding one of the old certainties that underpinned their relationship with the US. As Mr Brower at RS Energy puts it: “The pressures that Saudi Arabia are under are already immense.”

Saudi Arabia is the flagging horse of the Gulf – but Britain is still backing it as an answer to Brexit

Patrick Cockburn in The Independent


Why does the British Government devote so much time and effort to cultivating the rulers of Bahrain, a tiny state notorious for imprisoning and torturing its critics? It is doing so when a Bahraini court is about to sentence the country’s leading human rights advocate, Nabeel Rajab, who has been held in isolation in a filthy cell full of ants and cockroaches, to as much as 15 years in prison for sending tweets criticising torture in Bahrain and the Saudi bombardment of Yemen.

Yet it has just been announced that Prince Charles and Camilla, Duchess of Cornwall, are to make an official visit to Bahrain in November with the purpose of improving relations with Britain. It is not as though Bahrain has been short of senior British visitors of late, with the International Trade Minister Liam Fox going there earlier in September to meet the Crown Prince, Prime Minister and commerce minister. And, if this was not enough, in the last few days the Foreign Office Minister of State for Europe, Sir Alan Duncan, found it necessary to pay a visit to Bahrain where he met King Hamad bin Isa al-Khalifa and the interior minister, Sheikh Rashid al-Khalifa, whose ministry is accused of being responsible for some of the worst human rights abuses on the island since the Arab Spring protests there were crushed in 2011 with the assistance of Saudi troops.

Quite why Sir Alan, who might be thought to have enough on his plate in dealing with his area of responsibility in Europe in the era of Brexit, should find it necessary to visit Bahrain remains something of mystery. Sayed Ahmed Alwadei, director of advocacy at the Bahrain Institute for Rights and Democracy, asks: “Why is Alan Duncan in Bahrain? He has no reasonable business being there as Minister of State for Europe” But Sir Alan does have a long record of befriending the Gulf monarchies, informing a journalist in July that Saudi Arabia “is not a dictatorship”.

The flurry of high level visits to Bahrain comes as Rajab, the president of the Bahrain Centre for Human Rights, awaits sentencing on next week on three charges stemming from his use of social media. These relates to Rajab tweeting and retweeting about torture in Bahrain’s Jau prison and the humanitarian crisis caused by Saudi-led bombing in Yemen. After he published an essay entitled “Letter From a Bahrain Jail” in the The New York Times a month ago, he was charged with publishing “false news and statements and malicious rumours that undermines the prestige of the kingdom”.

This “prestige” has taken a battering since 2011 when pro-democracy protesters, largely belonging to the Shia majority on the island, were savagely repressed by the security forces. Ever since, the Sunni monarchy has done everything to secure and reinforce its power, not hesitating to inflame Sunni-Shia tensions by stripping the country’s most popular Shia cleric, Sheikh Isa Qassim, of his citizenship on the grounds that he was serving the interests of a foreign power.

Repression has escalated since May with the suspension of the main Shia opposition party, al-Wifaq, and an extension to the prison sentence of its leader, Sheikh Ali Salman. The al-Khalifa dynasty presumably calculates that US and British objections to this clampdown are purely for the record and can safely be disregarded. The former Foreign Secretary Philip Hammond claimed unblushingly earlier this year that Bahrain was “travelling in the right direction” when it came to human rights and political reform. Evidently, this masquerade of concern for the rights of the majority in Bahrain is now being discarded, as indicated by the plethora of visits.

There are reasons which have nothing to do with human rights motivating the British Government, such as the recent agreement to expand a British naval base on the island with the expansion being paid for by Bahrain. In its evidence to the Select Committee on Foreign Affairs, the Government said that UK naval facilities on the island give “the Royal Navy the ability to operate not only in the Gulf but well beyond in the Red Sea, Gulf of Aden and North West Indian Ocean”. Another expert witness claimed that for Britain “the kingdom is a substitute for an aircraft carrier permanently stationed in the Gulf”.

These dreams of restored naval might are probably unrealistic, though British politicians may be particularly susceptible to them at the moment, imagining that Britain can rebalance itself politically and economically post-Brexit by closer relations with old semi-dependent allies such as the Gulf monarchies. These rulers ultimately depend on US and British support to stay in power, however many arms they buy. Bahrain matters more than it looks because it is under strong Saudi influence and what pleases its al-Khalifa rulers pleases the House of Saud.

But in kowtowing so abjectly to Saudi Arabia and the Gulf kingdoms, Britain may be betting on a flagging horse at the wrong moment. Britain, France and – with increasing misgivings – the US have gone along since 2011 with the Gulf state policy of regime change in Libya and Syria. Saudi Arabia and Qatar, in combination with Turkey, have provided crucial support for the armed opposition to Bashar al-Assad. Foreign envoys seeking to end the Syrian war since 2011 were struck by British and French adherence to the Saudi position, even though it meant a continuance of the war which has destabilised the region and to a mass exodus of refugees heading for Western Europe.

Whatever the Saudis and Gulf monarchies thought they were doing in Syria, it has not worked. They have been sawing off the branch on which they are sitting by spreading chaos and directly or indirectly supporting the rise of al-Qaeda-type organisations like Isis and al-Nusra. Likewise in their rivalry with Iran and the Shia powers, the Sunni monarchies are on the back foot, having escalated a ferocious war in Yemen which they are failing to win.

In the past week Saudi Arabia has suffered two setbacks that are as serious as any of these others: on Wednesday the US Congress voted overwhelmingly to override a presidential veto enabling the families of 9/11 victims to sue Saudi Arabia. In terms of US public opinion, the Saudi rulers are at last paying a price for their role in spreading Sunni extremism and for the bombing of Yemen. The Saudi brand is becoming toxic in the US as politicians respond to a pervasive belief among voters that there is Saudi complicity in the spread of terrorism and war.

The second Saudi setback is different, but also leaves it weaker. At the Opec conference in Algiers, Saudi Arabia dropped its long-term policy of pumping as much oil as it could, and agreed to production cuts in order to raise the price of crude. A likely motivation was simple shortage of money. The prospects for the new agreement are cloudy but it appears that Iran has got most of what it wanted in returning to its pre-sanctions production level. It is too early to see Saudi Arabia and its Gulf counterparts as on an inevitable road to decline, but their strength is ebbing.

Opec bid to kill off US shale sends oil price down to 2009 low

Larry Elliott in The Guardian

Oil falls by $2 a barrel with energy shares as Opec refusal to stop flooding the market with cheap oil and likely US rate hike sends Brent crude tumbling

 

Oil rigs in western North Dakota, US. Opec plans not to cut output aims to kill off the threat from US shale oil by making it deeply unprofitable. Photograph: Matthew Brown/AP


Oil prices have slumped by 5% after the latest attempt by Saudi Arabia to kill off the threat from the US shale industry sent crude to its lowest level since the depths of the global recession almost seven years ago.

Signs of disarray in the Opec oil cartel prompted fears of a global glut of oil, wiping $2 off the price of a barrel of crude on Monday and leading to speculation that energy costs could continue tumbling over the coming weeks.

Shares in energy companies lost ground as the impact of the drop in oil prices rippled through European stock markets. Prices of other commodities also weakened following disappointment among traders that Opec had decided late last week to keep flooding the global market with cheap oil.

Iron ore continued its steady fall and finished the latest session at $38.90 per tonne, squeezing profit margins to the bone at even large producers such as Rio Tinto and BHP Billiton, whose shares fell sharply on the Australian stock market on Tuesday.

The consultancy Capital Economics tweeted: “#Oil sell-off after #OPEC makes even ECB look good. Better to have announced something, even if less than hoped for, than nothing at all...”

A barrel of benchmark Brent crude was changing hands for less than $41 a barrel in New York on Monday night after Opec – heavily influenced by Saudi Arabia – did nothing about a market already seen as saturated.

US light crude, which tends to trade at slightly lower levels than Brent, recorded similar falls, dropping from just over $40 a barrel to less than $38 a barrel.

Both Brent and US light crude were at levels not seen since early 2009, when the collapse of US investment bank Lehman Brothers triggered the most severe recession since the 1930s.

As recently as August 2014, Brent stood at $115 a barrel, but in 16 months its price has been more than halved in response to a slowdown in China and other emerging market economies, and the end of oil sanctions against Iran.

Global supply of oil is currently thought to be up to 2m barrels per day higher than demand, with traders fearing that Opec’s refusal to cut production despite the financial pain it is causing its members’ economies will lead to a still greater glut of crude. Venezuela, in particular, is thought to be suffering badly as a result of the drop in oil 

prices.

  Brent crude, from 2005-2015. Photograph: Thomson Reuters

The fall, if sustained, will lead to lower inflation in oil-consuming nations through the knock-on effects on petrol, diesel, domestic energy prices and the cost of running businesses.

Lower crude prices may also delay or limit increases in interest rates. The Bank of England has already accepted that inflation – which stands at -0.1% – has stayed lower for longer this year than it anticipated.

Analysts believe the slide in oil prices has come too late to persuade the US Federal Reserve, America’s central bank, to delay an increase in the cost of borrowing later this month, adding that the prospect of the first tightening of policy from the Fed since 2006 was an added factor in crude’s decline.

The prospect of higher US interest rates has led to the value of the US dollar rising on foreign exchanges; since oil is priced in dollars that has led to a fall in the cost of crude.

Markets had been expecting Opec to announce a new ceiling on production after last Friday’s meeting, but analysts at Barclays said the lack of any curbs in its announcement was a sign of discord.

“Past communiques have at least included statements to adhere, strictly adhere, or maintain output in line with the production target. This one glaringly did not,” they said.

Saudi Arabia needs oil prices of $100 a barrel to balance its budget, but as the world’s biggest exporter of crude it is gambling that the low price will knock out the threat posed by so-called unconventional supplies, such as shale.

The chief executive of Saudi Aramco, Amin Nasser, said at a conference in Doha on Monday that he hoped to see oil prices adjust at the beginning of next year as unconventional oil supplies start to decline.

In a sign that US production could dip, Baker Hughes’ November data showed US rig count numbers down month-by-month by 31 to 760 rigs.

The fall in oil prices helped wipe almost 1% off share prices in New York. Wall Street’s Dow Jones industrial average was down more than 160 points in early trading, with Chevron and Exxon both losing around 3% of their value.

In London, Shell’s share price was down 4.5% while BP lost 3.4% of its value as early gains in the FTSE 100 were wiped out. The Index closed 15 points lower at 6223.

Paralysed Opec pleads for allies as oil price crumbles

Ambrose Evans-Pritchard in The Telegraph

The Opec cartel is to continue flooding the world with crude oil despite a chronic glut and the desperate plight of its own members, demanding that Russia, Kazakhstan and other producers join forces before there can be output cuts.

Brent prices tumbled almost $2 a barrel to $42.90 as traders tried to make sense of the fractious Opec gathering in Vienna, which ended with no production target and no guidance on policy. It reeked of paralysis.

Prices are poised to test lows last seen at the depths of the financial crisis in early 2009. The shares of oil companies plummeted in London, and US shale drillers went into freefall on Wall Street.

Oil tankers are lined up off the cost of Texas, a flotilla of crude storage across the world  Photo: Alamy

“Lots of people said Opec was dead. Opec itself has just confirmed it,” said Jamie Webster, head of HIS Energy.

Venezuela’s oil minister, Eulogio del Pino, pushed for a cut in output of 1.5m barrels a day (b/d) to clear the market, describing the failure to act as calamitous. “We are really worried,” he said.

Abdallah Salem el-Badri, Opec’s chief, conceded that the cartel’s strategy has been reduced to an impotent waiting game, hoping that the pain of low prices will lure Russia and other global producers to the table. “We are looking for negotiations with non-Opec, and trying to reach a collective effort,” he said.

Mr el-Badri said there have been “positive” noises from some but none is yet ready to lock arms and create a sort of super-Opec, able to dictate prices. “Everybody is trying to digest how they can do it,” he said

The cartel’s 12 members postponed a decision on their next step until next year, once they know how much oil Iran will sell after sanctions are lifted. “The picture is not really clear at this time, and we are going to look one more time in June,” he said.

“Everybody is worried about prices. Nobody is happy,” said Iraq’s envoy, Adel Abdul Mahdi. His country has lost 42pc of its fiscal revenues and is effectively bankrupt.

Foreign companies are owed billions and have begun to freeze projects. The government cannot afford to pay its own security forces and is cutting vital funding for anti-ISIS militias, raising fears that the political crisis could spin out of control.

Helima Croft, from RBC Capital Markets, said four of the frontline states in the fight against ISIS are now being destabilized by the crash in oil prices, including Algeria and Libya.

Opec leaders will now have to grit their teeth and prepare for a long siege, testing their social welfare models to the point of destruction. Even Saudi Arabia is pushing through drastic austerity measures.

Deutsche Bank said the fiscal break-even cost needed to balance the budget is roughly $120 for Bahrain, $100 for Saudi Arabia, $90 for Nigeria and Venezuela, and $80 for Russia, based on current exchange rate effects.

“It is going to be 12 to 18 months before they see any relief,” David Fyfe, from the oil trading group Gunvor, said.

“We think oil stocks will continue to build in the first half of next year and we don’t think they will draw down to normal levels until well into 2017.”

Mr Fyfe said Iran has 40m to 50m barrels floating on tankers offshore that will flood onto the market as soon as sanctions are lifted. It will then crank up extra output to 500,000 b/d by the end of next year.

Per Magnus Nysveen, from Rystad Energy, said it will take a very long time to force the capitulation of America’s shale industry. While the rig count in the US has collapsed by 60pc over the past year, the number of wells being “fracked” has risen in recent weeks.

“There is still an inventory of 3,500 wells. Theoretically they could continue fracking at this pace for another six months without any new drilling. We don’t think there is going to be a significant fall in US output next year. It could be flat,” he said.

Mr Nysveen said the damage will be in other parts of the world, chiefly the mature offshore fields in the Gulf of Mexico, North Sea, Brazil and Africa. The decline rate of old fields will double to 10pc a year, subtracting 750,000 b/d from world supply within 12 months.

It is going to be a long war of attrition. The world is awash with oil. US crude inventories rose further last week by 1.6m barrels to the vertiginous level of 489.4m.

China has been soaking up some 250,000 b/d for its strategic reserves, preventing a collapse of the market. But the old sites are filling up and it is unclear whether new facilities are ready.

OPEC is now just as irrelevant as the once mighty Texas Railroad Commission

More than 100m barrels are being stored on tankers offshore. Tanker day-rates have soared to more than $111,000 – the highest since July 2008 – as the last remaining vessels are booked to absorb the glut.

Goldman Sachs warns that the market is approaching an “inflexion point” that could send prices crashing to a new a floor of $20, the "cash cost" that forces drillers to stop production altogether.

A dangerous situation is developing. Opec policy has caused spare capacity to fall to a wafer-thin margin of 2m b/d, leaving no one to act as the regulator of the market.

This sets the stage for a violent spike in prices down the road. The International Energy Agency says the world needs $650bn of fresh investment each year in upstream oil and gas just to stand still, yet $240bn has already been slashed from projects earmarked for next year.

Bhushan Bahree, from HIS Energy, says there is no longer anything to distinguish Opec members from any other producer. The cartel is defunct. “Opec and non-Opec are irrelevant classifications,” he said.

There is a new world order of three oil superpowers with roughly equal shares – Saudi Arabia, Russia and the US – and none of them is yet willing to cut output voluntarily to shore up prices.

The Americans would never agree to such a move. The Russians cannot easily do so, given that their key producers are listed-companies, supposedly answerable to shareholders, and Siberian conditions make it hard to switch output on and off. The Saudis are stuck.

Mr Bahree compares the demise of Opec with the fall of the Texas Railroad Commission, the once mighty giant that set output and controlled world prices through the middle years of the 20th century. The Commission still exists, a forgotten shadow of its former self. Today it issues local permits.

Saudi Arabia risks destroying Opec and feeding the Isil monster

'Saudi Arabia is acting directly against the interests of half the cartel and is running Opec over a cliff,' says RBC

Ambrose Evans-Pritchard in the Telegraph

The rumblings of revolt against Saudi Arabia and the Opec Gulf states are growing louder as half a trillion dollars goes up in smoke, and each month that goes by fails to bring about the long-awaited killer blow against the US shale industry.

"Saudi Arabia is acting directly against the interests of half the cartel and is running Opec over a cliff"

Helima Croft, RBC Capital Markets

Algeria's former energy minister, Nordine Aït-Laoussine, says the time has come to consider suspending his country's Opec membership if the cartel is unwilling to defend oil prices and merely serves as the tool of a Saudi regime pursuing its own self-interest. "Why remain in an organisation that no longer serves any purpose?" he asked.

Saudi Arabia can, of course, do whatever it wants at the Opec summit in Vienna on December 4. As the cartel hegemon, it can continue to flood the global market with crude oil and hold prices below $50.

It can ignore desperate pleas from Venezuela, Ecuador and Algeria, among others, for concerted cuts in output in order to soak the world glut of 2m barrels a day, and lift prices to around $75. But to do so is to violate the Opec charter safeguarding the welfare of all member states.

"Saudi Arabia is acting directly against the interests of half the cartel and is running Opec over a cliff. There could be a total blow-out in Vienna," said Helima Croft, a former oil analyst at the US Central Intelligence Agency and now at RBC Capital Markets.

The Saudis need Opec. It is the instrument through which they leverage their global power and influence, much as Germany attains world rank through the amplification effect of the EU.

The 29-year-old deputy crown prince now running Saudi Arabia, Mohammad bin Salman, has to tread with care. He may have inherited the steel will and vaulting ambitions of his grandfather, the terrifying Ibn Saud, but he has ruffled many feathers and cannot lightly detonate a crisis within Opec just months after entangling his country in a calamitous war in Yemen. "It would fuel discontent in the Kingdom and play to the sense that they don't know what they are doing," she said.

"We are feeling the pain and we’re taking it like a God-driven crisis"

Mohammed Bin Hamad Al Rumhy, Oman's oil minister

The International Energy Agency (IEA) estimates that the oil price crash has cut Opec revenues from $1 trillion a year to $550bn, setting off a fiscal crisis that has already been going on long enough to mutate into a bigger geostrategic crisis.

Mohammed Bin Hamad Al Rumhy, Oman's (non-Opec) oil minister, said the Saudi bloc has blundered into a trap of their own making - a view shared by many within Saudi Arabia itself.

“If you have 1m barrels a day extra in the market, you just destroy the market. We are feeling the pain and we’re taking it like a God-driven crisis. Sorry, I don’t buy this, I think we’ve created it ourselves,” he said.

The Saudis tell us with a straight face that they are letting the market set prices, a claim that brings a wry smile to energy veterans. One might legitimately suspect that they will revert to cartel practices when they have smashed their rivals, if they succeed in doing so.

One might also suspect that part of their game is to check the advance of solar and wind power in a last-ditch effort to stop the renewable juggernaut and win another reprieve for the status quo. If so, they are too late. That error was made five or six years ago when they allowed oil prices to stay above $100 for too long. But Opec can throw sand in the wheels.

At root is a failure to grasp how quickly the ground has already shifted from under the feet of the petro-rentier regimes. Opec forecasts that oil demand will keep rising relentlessly, adding 21m barrels of oil per day (b/d) to 111m by 2040 as if nothing had changed. They have their heads in the sand.

The climate pledges made for the COP21 summit in Paris by the US, China and India - to name a few - imply a radical shift in the global energy landscape. Subsequent deals by 2025 may well bring a "two degree world" within sight.

The IEA says oil demand will be just 103m b/d in 2040 even under modest carbon curbs. It would collapse to 83.4m b/d if global leaders grasp the nettle. My own view is that it will happen by natural market forces.

The next leap foward in technology is going to be in energy storage. Teams of scientists at Harvard, MIT and the world's elite universities are in a race to slash the cost of batteries - big and small - and overcome the curse of intermittency for wind and solar.

A team in Cambridge says it has cracked the technology for lithium-air batteries that cut costs by four-fifths and enable car journeys of hundreds of miles on a single charge. By the time we reach 2040, it is a fair bet the only petrol cars still on the road will be relics, if they can find fuel at all.

"Everything will be electrified. The internal combustion engine is a dead-end. We all know that, and the car companies ought to know that," said one official handling the COP21 talks.

Opec might be better advised to target prices of $75 to $80 and maximize revenues while it still can, taking advantage of a last window to break reliance on energy and diversify their economies.

The current war of attrition against shale is a hard slog. US output has dropped by 500,000 b/d since April, but the fall in October slowed to 40,000 b/d. Total production of 9.1m b/d is roughly where it was a year ago when the price war began.

"The expectation that a swift tailing-off in tight oil would lead to a rapid rebalancing in the market has proved to be misplaced," said the IEA. Costs are plummeting as rig fees drop and drilling time is slashed.

There is a time-lag effect. Shale cannot keep switching to high-yielding wells forever. Their hedging contracts are running out. The US energy departmentexpects a further erosion of 600,000 b/d next year, but this is not a collapse.

By then Opec will have foregone another half trillion dollars. "What is winning supposed to look like for the Saudis? Can they really endure another year of this?" said Ms Croft.

Opec can certainly bankrupt high-debt frackers but this does not shut down US shale in any meaningful way. The infrastructure and technology will remain. Stronger players will move in. Output will bounce back as soon as oil nears $60.

Shale frackers will respond with lightning speed to any rebound and create a permanent headwind for Opec over years to come, or a sort of "whack-a-mole" effect, contrary to warnings by the IEA this week that Mid-East producers may regain their 1970s stranglehold once rivals are cleared out.

What is clear is that the Opec squeeze has killed off $200bn of upstream oil investment, mostly in offshore projects, Canadian oil sands and Arctic ventures. That will cut oil output in the distant future, but it is a different story.

Saudi Arabia has certainly regained market share, but the cost is causing many in Riyadh to ask whether the brash new team in power has thought through the trade-off. While the Kingdom has deep pockets, they are not limitless. Kuwait, Qatar and Abu Dhabi all have foreign reserves that are three higher per capita.

It has been downgraded to A+ by Standard & Poor's and has a budget deficit of $100bn a year, forcing it to burn through reserves at a commensurate pace and now to tap the global bond market.

Austerity has finally arrived, a nasty shock that was not in the original plan. A confidential order from King Salman - marked "highly urgent" - has frozen new hiring by the state, stopped property contracts and purchases of cars, and halted a long list of projects. The Kingdom will have to slim down the edifice of subsidies and social patronage that keeps the lid on protest.

It is far from clear whether Saudi Arabia can continue to prop up allies in the region and bankroll Egypt, already struggling to defeat Isil forces in the Sinai. An Isil cell captured - and beheaded - a Croatian engineer on the outskirts of Cairo in August, even before the suspected bombing of a Russian airline this month.

The Isil brand has established a front in Libya and has launched attacks in Algeria, where the old regime is fraying, and oil and gas revenues fund the vitally-needed social welfare net.

Iraq is pumping oil a record pace but it is nevertheless spiraling into economic crisis, with a budget deficit of 23pc of GDP. Public sector wages are to be cut. The austerity budget for 2016 - based on $45 oil, down from $80 last year - has set off a political storm.

The government has slashed funding for the "Popular Mobilization" militia fighting Isil. "The Iraqi state faces a grave challenge. The budget crisis makes the status quo intractable," says Patrick Martin from the Institute for the Study of War.

Helima Croft says Isil is now operating close to Iraq's oil facilities near Basra, detonating a car bomb at a market in Zubayr last month. They clearly have the ability to attack energy targets, and have an incentive to do so since oil production within their Caliphate heartland is their main source of income.

Al Qaeda in the Islamic Maghreb showed it could launch a devastating surprise when it crossed into the Sahara two years ago and seized the Amenas gas facility in Algeria, killing 39 foreign hostages. Variants of Isil can strike anywhere they find a weak link.

"We remain concerned that they may eventually set their sights on a major oil facility. These are obvious targets of choice, and none of this geopolitical risk is priced into the market," she said.

Saudi Arabia itself is vulnerable. There have been five Isil-linked terrorist acts on Saudi soil since May. They include an attack on a security facility near the giant oil installation at Abqaiq, where clusters of pipelines offer the most inviting sabotage target in the petroleum world and where the aggrieved Shia minority sit on the Kingdom's oil reserves.

It would be a macabre irony if Saudi Arabia's high-risk oil strategy so enflamed a region already in the grip of four civil wars that the Kingdom was hoisted by its own petard. That would certainly clear the global glut of crude oil.

US shale oil stares into abyss with Opec ready push it over

Andrew Critchlow in The Telegraph


After hanging on for almost a year, the US shale oil industry is on the brink of complete capitulation. The reason for its impending downfall is simple: the lowest cost producer always wins. In this instance the most profitable producers are Saudi Arabia and its close Gulf Arab allies, who effectively control the Organisation of the Petroleum Exporting Countries (Opec).


To their credit, shale drillers and operators in Texas and North Dakota have hung on for far longer than anyone expected after Opec launched its pre-emptive oil price war last November. However, a year of oil prices trading at an average of around $50 per barrel is finally succeeding in reversing the dramatic increases in US production that had been so troubling the Gulf’s oil-rich sheikhs.


Total US output has fallen by almost 600,000 barrels per day (bpd) since the end of the first quarter, with the biggest declines occurring recently as operators begin to crack under the financial pressure caused by Opec’s squeeze on prices. By next year, the US government expects output to decline to an average of 8.6m bpd, down from an average of 9.3m bpd in 2015.


According to Mark Papa, the former head of US shale oil specialist operator EOG Resources, this is just the beginning of the downturn in North America. Speaking at the annual Oil and Money conference in London this week, Mr Papa said: “We are about to see a pretty dramatic decline in US production growth.”


The insurmountable problem the US shale oil industry faces is that it is too highly dependent on debt and too reliant on crude trading above $60 per barrel to remain profitable. Break-even prices in America’s most productive areas, such as the Eagle Ford and Bakken, are thought to range from $54 to almost $70 a barrel, which currently means producers are operating at a loss, living in hope that Opec finally relents and cuts production.




In these circumstances the only thing keeping many US drillers afloat is debt, which up until now has been cheap and plentiful.

According to the data provider Factset, the amount of debt held by US oil and gas producers has ballooned to almost $170bn (£111bn) this year, compared with $81bn five years ago. But the cost of servicing that debt has also increased exponentially after a number of operators saw their ratings reduced to junk.

Opec now only has to maintain its fragile cohesion and push a little harder for the entire shale oil industry in the US to fold.

However, the group of 12 mainly Middle Eastern oil producers is itself feeling the pain of lower oil prices. Its wealthiest members, such as Saudi Arabia, the United Arab Emirates and Kuwait, are having to fall back on their foreign currency reserves for the first time in almost 20 years to make up for the shortfall in revenues.

Poorer member countries such as Venezuela, Algeria and Nigeria are now at economic breaking point. Without vast sovereign wealth funds and an abundance of cheap oil, they are close to buckling and are demanding that Opec meets to revise its current strategy.

Although Opec’s secretary general has called for a meeting of oil experts in Vienna later this month, it is extremely unlikely that ministers from the group will gather before their next scheduled date in December. Meanwhile, Saudi Arabia has continued to pump at record rates above 10.5m bpd, a strategy which is making a mockery of Opec’s overall production ceiling of 30.5m bpd.

And then there is Iran and Iraq. Combined, these close political allies in the Middle East pose the biggest challenge to Saudi Arabia’s dominance of Opec. However, both countries desperately need higher oil prices to help shore up their battered economies.

Baghdad has compensated for falling oil prices by pumping more crude. The second largest producer in Opec is now pumping around 4m bpd of crude to replenish its dwindling foreign currency reserves, which have fallen by around 20pc this year.

Iran is also champing at the bit to increase production – with the end in sight for its economic isolation from the rest of the world. According to the Iranian government, the country could increase oil production by around 500,000 barrels per day within a few months of economic sanctions being fully lifted. The Islamic republic is already laying the foundations for a return of international oil companies, which could help to boost output.

Top oil official Seyed Mehdi Hosseini told a room packed with Western executives at the Oil and Money conference that Tehran was ready to offer 50 new projects to international investors. Any significant increase in Iranian oil supply would add to the current oversupply in markets, pushing prices even lower.

The end of Wahhabism? Saudi Arabia may go broke soon

Ambrose Evans Pritchard in The Telegraph

If the oil futures market is correct, Saudi Arabia will start running into trouble within two years. It will be in existential crisis by the end of the decade.

The contract price of US crude oil for delivery in December 2020 is currently $62.05, implying a drastic change in the economic landscape for the Middle East and the petro-rentier states.

The Saudis took a huge gamble last November when they stopped supporting prices and opted instead to flood the market and drive out rivals, boosting their own output to 10.6m barrels a day (b/d) into the teeth of the downturn.

Bank of America says OPEC is now "effectively dissolved". The cartel might as well shut down its offices in Vienna to save money.

If the aim was to choke the US shale industry, the Saudis have misjudged badly, just as they misjudged the growing shale threat at every stage for eight years. "It is becoming apparent that non-OPEC producers are not as responsive to low oil prices as had been thought, at least in the short-run," said the Saudi central bank in its latest stability report.

"The main impact has been to cut back on developmental drilling of new oil wells, rather than slowing the flow of oil from existing wells. This requires more patience," it said.

One Saudi expert was blunter. "The policy hasn't worked and it will never work," he said.

By causing the oil price to crash, the Saudis and their Gulf allies have certainly killed off prospects for a raft of high-cost ventures in the Russian Arctic, the Gulf of Mexico, the deep waters of the mid-Atlantic, and the Canadian tar sands.

Consultants Wood Mackenzie say the major oil and gas companies have shelved 46 large projects, deferring $200bn of investments.

The problem for the Saudis is that US shale frackers are not high-cost. They are mostly mid-cost, and as I reported from the CERAWeek energy forum in Houston, experts at IHS think shale companies may be able to shave those costs by 45pc this year - and not only by switching tactically to high-yielding wells.

Advanced pad drilling techniques allow frackers to launch five or ten wells in different directions from the same site. Smart drill-bits with computer chips can seek out cracks in the rock. New dissolvable plugs promise to save $300,000 a well. "We've driven down drilling costs by 50pc, and we can see another 30pc ahead," said John Hess, head of the Hess Corporation.

It was the same story from Scott Sheffield, head of Pioneer Natural Resources. "We have just drilled an 18,000 ft well in 16 days in the Permian Basin. Last year it took 30 days," he said.

The North American rig-count has dropped to 664 from 1,608 in October but output still rose to a 43-year high of 9.6m b/d June. It has only just begun to roll over. "The freight train of North American tight oil has kept on coming," said Rex Tillerson, head of Exxon Mobil.

He said the resilience of the sister industry of shale gas should be a cautionary warning to those reading too much into the rig-count. Gas prices have collapsed from $8 to $2.78 since 2009, and the number of gas rigs has dropped 1,200 to 209. Yet output has risen by 30pc over that period.

Until now, shale drillers have been cushioned by hedging contracts. The stress test will come over coming months as these expire. But even if scores of over-leveraged wild-catters go bankrupt as funding dries up, it will not do OPEC any good.

The wells will still be there. The technology and infrastructure will still there. Stronger companies will mop up on the cheap, taking over the operations. Once oil climbs back to $60 or even $55 - since the threshold keeps falling - they will crank up production almost instantly.

OPEC now faces a permanent headwind. Each rise in price will be capped by a surge in US output. The only constraint is the scale of US reserves that can be extracted at mid-cost, and these may be bigger than originally supposed, not to mention the parallel possibilities in Argentina and Australia, or the possibility for "clean fracking" in China as plasma pulse technology cuts water needs.

Mr Sheffield said the Permian Basin in Texas could alone produce 5-6m b/d in the long-term, more than Saudi Arabia's giant Ghawar field, the biggest in the world.

Saudi Arabia is effectively beached. It relies on oil for 90pc of its budget revenues. There is no other industry to speak of, a full fifty years after the oil bonanza began.

Citizens pay no tax on income, interest, or stock dividends. Subsidized petrol costs twelve cents a litre at the pump. Electricity is given away for 1.3 cents a kilowatt-hour. Spending on patronage exploded after the Arab Spring as the kingdom sought to smother dissent.

The International Monetary Fund estimates that the budget deficit will reach 20pc of GDP this year, or roughly $140bn. The 'fiscal break-even price' is $106.

Far from retrenching, King Salman is spraying money around, giving away $32bn in a coronation bonus for all workers and pensioners.

He has launched a costly war against the Houthis in Yemen and is engaged in a massive military build-up - entirely reliant on imported weapons - that will propel Saudi Arabia to fifth place in the world defence ranking.

The Saudi royal family is leading the Sunni cause against a resurgent Iran, battling for dominance in a bitter struggle between Sunni and Shia across the Middle East. "Right now, the Saudis have only one thing on their mind and that is the Iranians. They have a very serious problem. Iranian proxies are running Yemen, Syria, Iraq, and Lebanon," said Jim Woolsey, the former head of the US Central Intelligence Agency.

Money began to leak out of Saudi Arabia after the Arab Spring, with net capital outflows reaching 8pc of GDP annually even before the oil price crash. The country has since been burning through its foreign reserves at a vertiginous pace.

The reserves peaked at $737bn in August of 2014. They dropped to $672 in May. At current prices they are falling by at least $12bn a month.

Khalid Alsweilem, a former official at the Saudi central bank and now at Harvard University, said the fiscal deficit must be covered almost dollar for dollar by drawing down reserves.

The Saudi buffer is not particularly large given the country fixed exchange system. Kuwait, Qatar, and Abu Dhabi all have three times greater reserves per capita. "We are much more vulnerable. That is why we are the fourth rated sovereign in the Gulf at AA-. We cannot afford to lose our cushion over the next two years," he said.

Standard & Poor's lowered its outlook to "negative" in February. "We view Saudi Arabia's economy as undiversified and vulnerable to a steep and sustained decline in oil prices," it said.

Mr Alsweilem wrote in a Harvard report that Saudi Arabia would have an extra trillion of assets by now if it had adopted the Norwegian model of a sovereign wealth fund to recyle the money instead of treating it as a piggy bank for the finance ministry. The report has caused storm in Riyadh.

"We were lucky before because the oil price recovered in time. But we can't count on that again," he said.

OPEC have left matters too late, though perhaps there is little they could have done to combat the advances of American technology.

In hindsight, it was a strategic error to hold prices so high, for so long, allowing shale frackers - and the solar industry - to come of age. The genie cannot be put back in the bottle.

The Saudis are now trapped. Even if they could do a deal with Russia and orchestrate a cut in output to boost prices - far from clear - they might merely gain a few more years of high income at the cost of bringing forward more shale production later on.

Yet on the current course their reserves may be down to $200bn by the end of 2018. The markets will react long before this, seeing the writing on the wall. Capital flight will accelerate.

The government can slash investment spending for a while - as it did in the mid-1980s - but in the end it must face draconian austerity. It cannot afford to prop up Egypt and maintain an exorbitant political patronage machine across the Sunni world.

Social spending is the glue that holds together a medieval Wahhabi regime at a time of fermenting unrest among the Shia minority of the Eastern Province, pin-prick terrorist attacks from ISIS, and blowback from the invasion of Yemen.

Diplomatic spending is what underpins the Saudi sphere of influence caught in a Middle East version of Europe's Thirty Year War, and still reeling from the after-shocks of a crushed democratic revolt.

We may yet find that the US oil industry has greater staying power than the rickety political edifice behind OPEC.