Saudi Arabia’s Needs Have Become Iran’s Problems

While Israel has been the barking dog pushing hostilities against Iran, it is the Saudis that are truly most threatened by Iran’s return to the global economy.  They are as much, if not a bigger, agitator for tearing up the Iran Nuclear Deal as Israel has been.

A report earlier this week from the International Monetary Fund argued that Saudi Arabia still needs oil trading at $88 per barrel to balance its budget and pull off the structural reforms the country needs.

Crown Prince Mohammed bin Salman’s Vision 2030 plan, which has the usual suspects in Washington salivating at the prospect of leaching off of, will require a complete make-over of Saudi society.  It will likely cost trillions.  And the Saudis still have a big budget deficit.

It is set to shrink to a more manageable 7% of GDP this year while expanding government spending by more than 5%.


2018 Cuts the Deficit to 7.3% of GDP, thanks to $70/bbl Oil

And the only thing keeping this budget deficit moving lower is, of course, higher oil prices.  Last year’s breakeven point was just $70 per barrel. But that rises this year to $88 according to the IMF because Bin Salman has begun the spending associated with Vision 2030.

Now, since the implementation of the Iran Nuclear Deal (JCPOA) Iran’s oil output has risen back to its pre-sanctions level of around 3.8 million barrels per day.


Iran’s Oil Production Now Exceeds, on Average, it’s Pre-Sanctions Level in 2012

With new exploration and production deals signed by European, Chinese and Russian oil majors Iran’s output over the next few years could easily push over 4 million barrels if not closer to 5 million.

While at the same time Saudi Arabia wants to both cut back on production and its exports to raise the price per barrel to the level it needs.  So, it shouldn’t take a genius to see the incentive here to try and bribe President Trump with hundreds of billions in arms sales and promises of fighting Iran in Syria to get him to de-certify the JCPOA and have the deal fall apart.

U.S. Mob Rule

The Saudis, to some extent, are being shook down by Trump, Mafioso-style, for our nuclear shield.  In exchange for help bottling up Iran and raising oil prices the Saudis will have to spend a lot of their savings pump-priming the U.S. economy with new refineries in Texas and more planes to drop bombs on weddings.

You know, win/win.

If the Saudis need $88 per barrel oil then Iran has to have its output cut to offset the rising price per barrel.

With the reports that U.S. Green Berets are present on the battlefield in Yemen should tell you that the Trump Administration is uninterested in any outcome in the Middle East that doesn’t end with Iran’s capitulation to Israeli and Saudi (and therefore U.S.) needs and Russia and China’s humiliation for backing Iran.

The White House is fully staffed with people willing to commit or condone the worst human rights violations in Yemen and Syria in order to stop Iran.

The question is, “Stop Iran from what?”  The conventional answer from Trump and K-Street foreign policy ‘experts’ is, “Gaining a nuclear weapon.”  The real answer, however, is much simpler than that.

Iran will not be allowed to re-join the global economy as an independent actor.  That position will be maintained even if the theocracy is overthrown.  Because this supposed existential fight to the death between Saudi Arabia and Iran has little to do with religion and old enmities.

It has to do with oil.   Saudi Arabia wants Iran back to less than 3 million barrels a day to support higher prices.  Israel and the U.S. want to starve the Iranian government of money, so pulling out of the deal will allow the U.S. to re-impose sanctions on Iran, cutting it out of the global banking system again.

But Iran being back to pre-2012 production levels and removing the U.S. dollar from its oil trade officially means that China has a different partner to buy its oil from.  And that supports the fledgling petroyuan system developing in Shanghai financial markets.

The China Syndrome

Sinopec is set to curb imports of Saudi Oil another 40% this month citing inexplicable high prices from the Saudis during a time when a significant portion of Sinopec’s refineries are down for annual maintenance and other producers are happy to offer more for less to grab market share.

Last month, a Unipec official told Reuters, “Our refineries think these are unreasonable prices as they do not follow the pricing methodology.” Besides Sinopec, a source from another two refineries in northern Asia said they will be cutting their imports from Saudi Arabia by ten percent as oil buyers have a hard time grasping how the Kingdom is calculating the price for its most popular grade.

The price increase came as a surprise to the biggest market for crude in the world.

Aramco is pushing China at a time when it’s clear it has other options in the oil market and no longer wants to pay for oil in dollars.  Brazil’s imports to China have risen sharply.  Iran’s imports to India, tangentially related, are set to double this year to nearly 400,000 bbl/day.

Trump may want the Saudis, again mafioso-style, to raise its prices to get China to import U.S. oil as the Brent/WTI spread continues to widen, now over $6, to combat the U.S. trade deficit with China.  Not that that makes a lick of sense, but then again, Trump is a mercantilist, which also doesn’t make any sense.

So, at least its consistent.

U.S. production keeps surging and will continue for likely the rest of 2018 and beyond as new fracking techniques lengthen the production time of new wells, albeit at lower daily output.

So, even if rig counts fall, which they show no signs of doing, U.S. shale oil output will keep rising.  Brent output is falling, U.S. production is rising.  So, the Brent/WTI spread will continue to widen if new ‘markets’ aren’t opened up for U.S. shale producers.

This again, brings me back to the Iran Nuclear Deal being all about oil and not about bombs.  Ending the deal will allow Iran to restart its program which the conventional wisdom says they can spin up to a viable weapon within 18 months, quicker if its partner North Korea was successful in producing a viable warhead.

But, having removed Iran from the SWIFT financial payments network and seen Iran survive it, the threat of sanctions and SWIFT expulsion seem hollow. Both China and Russia have viable SWIFT alternatives and Iran has so few ties to both U.S. and European banking institutions after nearly a decade of hostilities.

Moreover, Turkey, who helped Iran survive without SWIFT in the past, is more than happy to stick it to the U.S. after its backing the Syrian Kurds.  In short, Iran has a lot more friends today than it did in 2012.

China and Russia are immensely stronger.  Israel and Saudi Arabia far weaker.  And that means that regardless of what Trump does on May 12th, the world is already prepared for the next steps.

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7 thoughts on “Saudi Arabia’s Needs Have Become Iran’s Problems

  1. Why are we not helping the Iranians to take the Saudis out of contention? I don’t see their reforms ending their support of crazy Salafist head choppers. Our interests would seem to lie with Iran’s in this case. Or is this a question of the obvious elephant in the room (our greatest ally)?

  2. Irony abounds: US shale production probably breaks even above $70 per barrel:

    Did US Shale Really Hit a $25/Barrel Breakeven Price?

    * *

    On Sat, May 5, 2018 at 10:27 AM, Gold Goats ‘n Guns wrote:

    > Tom Luongo posted: “While Israel has been the barking dog pushing > hostilities against Iran, it is the Saudis that are truly most threatened > by Iran’s return to the global economy. They are as much, if not a bigger, > agitator for tearing up the Iran Nuclear Deal as Israel has” >

  3. U.S. Shale breaks even now a lot lower than $70. Financing costs for a lot of these properties that were distressed sales back in 2015 now have much lower break-even numbers. The best I’ve heard from industry sources is that anything over $55 is a god-send, since the market is tuned around that number or lower.

    The reality is with frac sand prices still low and new techniques improving overall output, a lot of wells are very profitable at $45 and below. $25 I don’t believe for a second as an industry average. Also, as Frac Sand prices rise (and that market for premium sand is very very tight) COGS will as well, but it will still be bottom line accretive.

    The Saudis are the ones with the problems in this scenario. Russia can pump down to $20/bbl and break-even. It’ll be ugly on state finances but there it is. Iran would be in a similar boat. So, if regime change is truly the goal then another round of that is in order, but that means watching Saudi Arabia go into the ashbin of history.

    Hence, the push to isolate Iran financially to drive down its revenues.

  4. How Wall Street Enabled the Fracking ‘Revolution’ That’s Losing Shale Oil Companies Billions

    The U.S. shale oil industry hailed as a “revolution” has burned through a quarter trillion dollars more than it has brought in over the last decade. It has been a money-losing endeavor of epic proportions.

    In September 2016, the financial ratings service Moody’s released a report on U.S. oil companies, many of which were hurting from the massive drop in oil prices. Moody’s found that “the financial toll from the oil bust can only be described as catastrophic,” particularly for small companies that took on huge debt to finance fracking shale formations when oil prices were high.

    And even though shale companies still aren’t turning a profit, Wall Street continues to lend the industry more money while touting these companies as good investments. Why would investors do that?

    • I have no problem with that analysis. There are certainly players in the industry that are over-levered nightmares. But, there’s also a lot more people pumping at far lower prices than in the past. It depends on the quality of their balance sheet.

      The companies cited in that article (a good one, no doubt) are ones still working off a model that is dead. I bet Continental never sold any ‘core’ assets and are trying to beat the financing curve with higher oil prices.

      The truth is that when the money flows that freely and someone knows what D.C.’s policy will be (and Trump wants frackers profitable) then there is no incentive to improve operations or jettison bad assets.

      OTOH, many companies have picked up great assets at stink-bid prices and have converted them into low-cost production areas. The industry is mixed depending on which side of the fence you choose to be on.

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