Oil wars

The Saudi Oil War Against Russia, Iran and the US

Saudi Arabia has unleashed an economic war against selected oil producers. The strategy masks the House of Saud’s real agenda. But will it work?

Pepe Escobar

Information Clearing House,

16 October, 2014

Rosneft Vice President Mikhail Leontyev; “Prices can be manipulative…Saudi Arabia has begun making big discounts on oil. This is political manipulation, and Saudi Arabia is being manipulated, which could end badly.”

A correction is in order; the Saudis are not being manipulated. What the House of Saud is launching is “Tomahawks of spin,” insisting they’re OK with oil at $90 a barrel; also at $80 for the next two years; and even at $50 to $60 for Asian and North American clients.

The fact is Brent crude had already fallen to below $90 a barrel because China – and Asia as a whole – was already slowing down economically, although to a lesser degree compared to the West. Production, though, remained high – especially by Saudi Arabia and Kuwait - even with very little Libyan and Syrian oil on the market and with Iran forced to cut exports by a million barrels a day because of the US economic war, a.k.a. sanctions.

The House of Saud is applying a highly predatory pricing strategy, which boils down to reducing market share of its competitors, in the middle- to long-term. At least in theory, this could make life miserable for a lot of players – from the US (energy development, fracking and deepwater drilling become unprofitable) to producers of heavy, sour crude such as Iran and Venezuela. Yet the key target, make no mistake, is Russia.

A strategy that simultaneously hurts Iran, Iraq, Venezuela, Ecuador and Russia cannot escape the temptation of being regarded as an “Empire of Chaos” power play, as in Washington cutting a deal with Riyadh. A deal would imply bombing ISIS/ISIL/Daesh leader Caliph Ibrahim is just a prelude to bombing Bashar al-Assad’s forces; in exchange, the Saudis squeeze oil prices to hurt the enemies of the “Empire of Chaos.”

Yet it’s way more complicated than that.

Sticking it to Washington

Russia’s state budget for 2015 requires oil at least at $100 a barrel. Still, the Kremlin is borrowing no more than $7 billion in 2015 from the usual “foreign investors”, plus $27.2 billion internally. Hardly an economic earthquake.

Besides, the ruble has already fallen over 14 percent since July against the US dollar. By the way, the currencies of key BRICS members have also fallen; 7.8 percent for the Brazilian real, 1.6 percent for the Indian rupee. And Russia, unlike the Yeltsin era, is not broke; it holds at least $455 billion in foreign reserves.

The House of Saud’s target of trying to bypass Russia as a top supplier of oil to the EU is nothing but a pipe dream; EU refineries would have to be reframed to process Saudi light crude, and that costs a fortune.

Geopolitically, it gets juicier when we see that central to the House of Saud strategy is to stick it to Washington for not fulfilling its “Assad must go” promise, as well as the neo-con obsession in bombing Iran. It gets worse (for the Saudis) because Washington – at least for now – seems more concentrated in toppling Caliph Ibrahim than Bashar al-Assad, and might be on the verge of signing a nuclear deal with Tehran as part of the P5+1 on November 24.

On the energy front, the ultimate House of Saud nightmare would be both Iran and Iraq soon being able to take over the Saudi status as key swing oil producers in the world. Thus the Saudi drive to deprive both of much-needed oil revenue. It might work – as in the sanctions biting Tehran even harder. Yet Tehran can always compensate by selling more gas to Asia.

So here's the bottom line. A beleaguered House of Saud believes it may force Moscow to abandon its support of Damascus, and Washington to scotch a deal with Tehran. All this by selling oil below the average spot price. That smacks of desperation. Additionally, it may be interpreted as the House of Saud dithering if not sabotaging the coalition of the cowards/clueless in its campaign against Caliph Ibrahim’s goons.

Compounding the gloom, the EU might be allowed to muddle through this winter – even considering possible gas supply problems with Russia because of Ukraine. Still, low Saudi oil prices won’t prevent a near certain fourth recession in six years just around the EU corner.

Go East, young Russian

Russia, meanwhile, slowly but surely looks East. China’s Vice Premier Wang Yang has neatly summarized it; “China is willing to export to Russia such competitive products as agricultural goods, oil and gas equipment, and is ready to import Russian engineering products.” Couple that with increased food imports from Latin America, and it doesn’t look like Moscow is on the ropes.

A hefty Chinese delegation led by Premier Li Keqiang has just signed a package of deals in Moscow ranging from energy to finance, and from satellite navigation to high-speed rail cooperation. For China, which overtook Germany as Russia’s top trading partner in 2011, this is pure win-win.

The central banks of China and Russia have just signed a crucial, 3-year, 150 billion yuan bilateral local-currency swap deal. And the deal is expandable. The City of London basically grumbles- but that’s what they usually do.

This new deal, crucially, bypasses the US dollar. No wonder it’s now a key component of the no holds barred proxy economic war between the US and Asia. Moscow cannot but hail it as sidelining many of the side effects of the Saudi strategy.

The Russia-China strategic partnership has been on the up and up since the “epochal” (Putin’s definition) $400 billion, 30-year “gas deal of the century” clinched in May. And the economic reverberations won't stop.

There’s bound to be an alignment of the Chinese-driven New Silk Roads with a revamped Trans-Siberian railway. At the Shanghai Cooperation Organization (SCO) summit last month in Dushanbe, President Putin praised the “great potential” of developing a “common SCO transport system” linking “Russia’s Trans-Siberian railway and the Baikal-Amur mainline” with the Chinese Silk Roads, thus “benefiting all countries in Eurasia.”

Moscow is progressively lifting restrictions and is now offering Beijing a wealth of potential investments. Beijing is progressively accessing not only much-needed Russian raw materials but acquiring cutting-edge technology and advanced weapons.

Beijing will get S-400 missile systems and Su-35 fighter jets as soon as the first quarter of 2015. Further on down the road will come Russia’s brand new submarine, the Amur 1650, as well as components for nuclear-powered satellites.

The road is paved with yuan

Presidents Putin and Xi, who have met no less than nine times since Xi came to power last year, are scaring the hell out of the “Empire of Chaos.” No wonder; their number one shared priority is to dent the hegemony of the US dollar – and especially the petrodollar - in the global financial system.

The yuan has been trading on the Moscow Exchange - the first bourse outside of China to offer regulated yuan trading. It’s still at only $1.1 billion (in September). Russian importers pay for 8 percent of all Chinese goods with yuan instead of dollars, but that’s rising fast. And it will rise exponentially when Moscow finally decides to accept yuan under Gazprom’s $400 billion “gas deal of the century.”

This is the way the multipolar world goes. The House of Saud deploys the petrodollar weapon? The counterpunch is increased trade in a basket of currencies. Additionally, Moscow sends a message to the EU, which is losing a lot of Russia trade because of counter-productive sanctions, thus accelerating the EU’s next recession. Economic war does work both ways.

The House of Saud believes it can dump a tsunami of oil in the market and back it up with a tsunami of spin – creating the illusion the Saudis control oil prices. They don’t. As much as this strategy will fail, Beijing is showing the way out; trading in other currencies stabilizes prices. The only losers, in the end, will be those who stick to trade in US dollars.

Pepe Escobar is the roving correspondent for Asia Times/Hong Kong

Saudi Arabia's Oil Price 'Manipulation' Could Sink The Russian Economy

BusinessInsider,

13 October, 2014

Brent crude oil spot price.

The vice-president of Russia’s state-owned oil behemoth Rosneft has accused Saudi Arabia of manipulating the oil price for political reasons.Mikhail Leontyev was quoted in Russian media as saying:

Prices can be manipulative. First of all, Saudi Arabia has begun making big discounts on oil. This is political manipulation, and Saudi Arabia is being manipulated, which could end badly.

The news comes as Reuters reports Saudi officials have been privately admitting to oil market participants that they are comfortable with lower oil prices. According to the news service, the Organisation of the Petroleum Exporting Countries (OPEC) is willing to accept prices as low as $US80 a barrel for as much as the next two years.

Falling prices are of particular concern to Russia. Russia needs high oil prices to buoy its economy. The country has seen its economic performance slow under the weight of sanctions over Ukraine and weakening domestic demand. The Russian Central Bank forecasts growth over 2014 to be a meager 0.4%, improving marginally to between 0.9%-1.1% in 2015.

The problem is that Russia’s latest budget requires oil prices to average at least $US100 a barrel in order to cover the government’s spending promises. The government already needs to borrow around $7 billion from foreign investors next year and as much as 1.1 trillion rubles ($27.2 billion) from domestic investors. Given the country’s sanctions-imposed isolation from international bond markets, any additional borrowing would be a big concern for policymakers in Moscow.

Finance Minister Anton Siluanov has already acknowledged that the budget forecasts for both Russian GDP growth and oil prices are “optimistic.” During the Reuters Russia Investment Summit in September he was quoted as saying:

There are risks to economic growth rates. It is a rather optimist forecast; there are risks to oil price. Without a doubt, this and the next year we will have to try very hard to ensure the planned growth rates.

If the forecast growth fails to materialise and the oil price continues its slide it could force the Russian government into an embarrassing retreat on spending commitments and increase the country’s economic woes.

Russia responds to U.S.-Saudi oil market manipulation by dumping dollars to protect currency

© Spencer Platt/Getty Images

Sott.net

10 October, 2014

As the United States expands its proxy war against Russia and the BRICS nations through a newly discovered secret deal with Saudi Arabia to force down global oil prices, Russia is firing back to this monetary attack against their currency and economy. On Oct. 10, a new report on Russian currency outflows shows that during the third quarter ending in September, the Eurasian state paid off a near record $53 billion in foreign debt, and sold off dollars to use as capital to stabilize their declining currency, and to protect their primary resource industry from the deflation America has caused through the dumping of excess oil into the market supply.

Some of this money was used earlier this week to support the declining Rouble as President Putin authorized the transfer of over $2 billion to be used directly to support the Russian currency. Additionally, the Russian central bank has already authorized funds to be set aside to supplement Russian corporations and oil industries should the need arise for liquidity and capital.

Despite the reassuring narrative from The West that Russia faces "costs" and is increasingly "isolated" due to sanctions for its actions in Ukraine, the most recent data suggests reality is quite different. First, capital outflows slowed dramatically in Q3 (from $23.7 billion in Q2 to $13 billion in Q3) with September seeing capital inflows for the first time since Sept 2013. Second, Russia's current account surplus was significantly stronger than expected ($11.4 billion vs $8.8 billion expected) driven by increased trade. Third, and perhaps most crucially, Russia paid down a massive $52.8 billion in foreign debt as Putin "de-dollarizes" at near record pace, reducing external debt to the lowest since 2012. 

---Zerohedge

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