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Page added on August 19, 2015

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Syria Diplomacy and Oil: Geopolitics May Change Oil Outlook Dramatically Again

Syria Diplomacy and Oil: Geopolitics May Change Oil Outlook Dramatically Again thumbnail

As the U.S. Congress gears up to debate the merits of the nuclear deal signed between Iran and the P5+1 powers last July , the Obama Administration is working overtime to get Mideast diplomacy off the ground to prove that the politically controversial deal is paying the way for a better Middle East. The effort, if successful, could have large implications for global oil markets, now facing a major price collapse.

Last week, a flurry of activity including high level meetings between Russian and Saudi diplomats, Iran’s foreign minister Javad Zarif and Syrian President Bashir al-Assad and Iranian and Lebanese officials (http://www.aucegypt.edu/GAPP/CairoReview/Pages/articleDetails.aspx?aid=871). The blogosphere was buzzing with rumors, including one that Riyadh and Tehran are agreeing on a formula that would restrict Hezbollah back to Lebanon, cordon Bashir al-Assad off to a limited titular role and begin serious negotiations for an inclusive political transition in Syria. (http://www.timesofisrael.com/irans-syria-plan-hezbollah-withdrawal-assad-as-toothless-leader/) One report on the deal purports an Iranian proposal that encompasses a cease fire and full-scale, free elections in Syria. ( http://www.al-monitor.com/pulse/originals/2015/08/lebanon-iran-zarif-visit-messages-implications-repercussions.html#) Russia added to momentum to positive prognostication when Fyodor Lukyanov, chairman of a council that advises the Kremlin on foreign policy uttered a more lukewarm support for Assad in an interview with the New York Times, proclaiming “Saudi still believes that Assad should go, but now they are a little less sure that the alternative will be better…Russia still believes he should stay, but cannot ignore that the general situation is changing, that the strategic position of Syria is much worse now than before.” (http://www.nytimes.com/2015/08/12/world/middleeast/new-diplomacy-seen-on-us-russian-efforts-to-end-syrian-civil-war.html?_r=1) But today’s rhetoric out of Russian-Iranian public announcements is unchanged in rejecting calls for Assad to step down as the head of Syria so hard to know if a meaningful deal can really be achieved. Zarif said at a press conference in Moscow, “The Syrians must themselves decide their fate, their future, while foreign states should only make this easier.”  (http://www.rferl.mobi/a/27192710.html) To date, the complex conflict has defied any and all attempts at a peace conference or cease fire.

From the United States point of view, positive movement on the Syrian front would permit a very key development. Turkey, Saudi Arabia, the United States, Iran and Russia could all come together in a concerted effort to stop the Islamic State (ISIS).

But for oil markets, most interestingly, it would lay the groundwork for Saudi Arabia and Iran to work more cooperatively inside the Organization of Petroleum Exporting Countries (OPEC). A surprisingly resilient U.S. oil production from shale, combined with the cloudier outlook for China’s economy, means OPEC would have its work cut out for it to bring prices back to the lofty levels seen in 2014. Analysts agree that a Saudi gesture to pull back its high production would at least give markets reprieve from the current free fall. Sources say Saudi Arabia may be inclined to consider an OPEC floor price $60 to $65 a barrel, were Iran’s actions in Syria demonstrate a serious commitment to a peace process. Any Saudi move would likely require real progress on the ground in Syria, not just on paper.

So far, oil markets are ignoring signs that diplomacy is intensifying. Instead, “lower for longer” is becoming the catch phrase for 2016 and puts are being placed at $35 a barrel West Texas Intermediate, now that  $45 has been breached. The International Energy Agency (IEA) reported last week that despite strong demand, the oil market oversupply will extend into 2016. The IEA revised its demand forecast for 2015 upwards to 1.6 million b/d but said that an overhang of 3 million b/d of oil will persist into the first half of 2016. The IEA report said non-OPEC oil production is still on the upswing of over 1 million b/d, though down from last year’s 2.4 million b/d.

For U.S. shale producers, the summer oil price downturn will test abilities to cut costs. There seems to be no end of investors willing to throw a few more dollars at shale oil producers. Financial markets and private equity firms still have an appetite for corporate bonds and other facilities on offer to cash in ahead of the expected rebound in oil prices, whenever it happens. Rather than the wave of bankruptcies predicted if oil prices went below $50 a barrel, shale producers still seem resilient, saying that they can keep going given hedges and rising productivity.

There seems to be some evidence that experienced wildcatters, figuring $100 oil would never last, had produced some of the more marginal acreage first, and are now, given oil price pressures, shifting to areas where unit costs can be better controlled. All this will mean that even if Saudi Arabia and Iran can reach a truce in Syria that holds, OPEC will still have its work cut out for it in fashioning a production quota sharing deal that will move prices back to target levels this year. The producer organization may have to position itself in a more forward looking, longer term strategy to capture market share when the supply hole comes from tightening budgets for oil sands, Arctic and deepwater drilling in the next three to five years.

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6 Comments on "Syria Diplomacy and Oil: Geopolitics May Change Oil Outlook Dramatically Again"

  1. Makati1 on Wed, 19th Aug 2015 8:09 pm 

    US shale is about to be trashed as cheap credit is running out. This is another ad for the petroleum industry to keep the suckers on the hook and let the elite bleed them dry before defaulting and moving to New Zealand.

  2. joke on Thu, 20th Aug 2015 3:36 am 

    Cheap credit is not running out. China is about to go down even more, such a move prevents a rate hike anywhere in the world as commodities are mostly priced in dollars, making imports to China more expensive, since most US companies source and make their goods in China then it would make US goods more expensive. This is a flaw in the Globalised economy, that competitive advantages are temporary. Eventually all ship rise and fall together. They can’t raise rates because without China doing well then a rate hike would cause the inflation Yellen wants to prevent, it’s an obvious (but seemingly overlooked) consequence that the mass media has missed. So the media is confused and they can’t seem to figure this one out.

  3. Makati1 on Thu, 20th Aug 2015 9:09 pm 

    joke, I can only say that China is going to come thru this mess much better then the US. US debt $17 trillion plus. China Foreign reserves ~$4 trillion plus.

    China does not have the many social promises that the US has (Food Stamps, Welfare, Social Security, Medicare, Medicaid, Etc.) to pay for to keep the lid on the sheeple. Or a trillion dollar military to support.

    And, you are correct, they make most of the stuff Americans use, so it will affect exports to the US. However, that is now only 17% of their total exports, and shrinking as they spread out into the rest of the world. But that 17% is 40% of US imports.

  4. joke on Fri, 21st Aug 2015 1:18 am 

    Since QE has continued unabated in the US, then it proves that the world economy is being run by two things, governments and currency traders. Commodities prices merely reflect how currencies are interacting. Chinese growth is slow because there are relatively fewer mega projects and mega cities being built, in the clearest example of how command economies fail we are finally seeing China begin to wobble. Not that a laissez faire economy would do much better. Deregulation and profit seeking brought US to 07/08. Changing China now would cause the Chinese people to view the system as repulsive, this would take China back to 1989 as if the last 25 years never happened politically, and that is something the world economy cannot sustain in its current globalised form. Just wondering is that 17% by volume or by dollar value? The implications for either can tell allot about the true nature for that trade. If it’s by value then the volume could be high, if it’s by volume then the value could be high. Either way, a rate hike would force the dollar up, forcing the prices China pays for goods up, and the profits for US companies down, thus forcing them to pass the higher costs to the US end user, thus making a rate hike a big waste of time. Maybe they might do it for the political feelgood factor, but that’s all.
    Almost certainly a FED rate hike would have a bad effect on the other world currencies like the Euro where they would have to raise rates and that would damage consumer spending there ….

  5. Davy on Fri, 21st Aug 2015 5:51 am 

    Dream on Mak, China has 3.4Bil population in a destroyed ecosystem from greedy and malicious growth against Mother Nature. China is an example of complete disregard for its people and its environment for profit. Not the common China man but everyone above him. Yes, Mak, the west was very much a part of that evil but the majority of the blame goes to Asians who chose a western path of consumption and an Asian path of high population density.

    You are so much fun lately Mak. Every day the news gets worse out of Asia and you are crowing. Baghdad Bob anyone! I know you can’t stand the possibility the US could be the last man standing before they too fall over the cliff. All your Brics are a mess and in decline. We know the west is in decline including the US but my point is it is your agenda that has failed and this failure is leaving you looking the fool. Keep it up Mak so I can have my morning enjoyment. Your daily attacks on the US are exposing nothing new. Most of it is copy and paste boredom.

    We are all going down and likely in a dominos crash. This is our payback for reckless globalism that chose unsustainable and non-resilient way of life. We deserve what we are getting all of us including your rotting Asia Makster.

  6. BobInget on Sun, 23rd Aug 2015 12:29 pm 

    First of all, oil markets have already experienced ‘a major price collapse’.
    Ten percent is major, 60% what we have today, out of the park.

    ‘Big Powers’ are only now beginning to understand the human disaster that is Syria.
    Ten (10) million Syrians are displaced internally and on the move. Winter is coming. Turkey can’t take care of two million Syrians. Greece certainly can’t handle fifty thousand war refugees a WEEK. Nor can Europe turn them away. Oh, just so ya know, to date the USA —
    “Of 4 Million Syrian Refugees, The U.S. Has Taken Fewer Than 1,000” NPR

    The shear volume of people fleeing violence around the planet increases by the day.

    Ask a random number of Americans if they have heard of Syria’s civil war. If they say yes, ask
    them which side has the US taken. Ask again if we, the US, should take in refugees? If they say yes,ask if they understand, these people are Muslim?

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