Last week, Gillian Rich at Investor’s Business Daily (Washington), asked me (Berlin) and others about the OPEC’s 20-21 June meeting. Below here, I give my views in more detail, including the tie-in to the Trump project to isolate Iran and my comment about Putin likely betraying the Iranians again. The IBD piece is here: Trump Could Make OPEC’s Next Meeting As Dysfunctional As G-7 Summit. 15 June ’18.
We spoke about market and geopolitical aspects. On the latter, I emphasized both the Trump Administration’s evolving plan to sanction and isolate Iran, and Russia’s new role as a central player with OPEC ever since the 2016 joint Russian-OPEC decision to raise production.
That’s when Putin played a new role for any Russian leader. Not only did he coordinate Russian oil policy with OPEC’s, he got personally involved in heated discussions, getting on the phone late in the last night with Iranian and Saudi leaders to get the deal sealed.
In 2014, as prices were crashing, al-Naimi said that there was no way nowadays that OPEC alone could cut sufficient production to reverse this. Indeed, he met with Russia and Mexico, at the insistence of Venezuela, before the late-2014 OPEC summit to see what these two non-OPEC states were willing to do to help out. At that time, the Russians (much less the Mexicans) were still unwilling to join with OPEC. So, instead of implementing cuts, al-Naimi led OPEC to increase production, declaring a (ultimately unsuccessful) price war against US shale producers, whose new cheap oil had been driving down prices.
Finally, in 2016, after almost two years of crushingly low prices, Russia was finally willing to come onboard late in the year, joining in the first-ever coordinated OPEC-Russian production cuts, and in the process Putin (and Rosneft’s Igor Sechin) personally played an essential role inside OPEC by cajoling the Iranians to go along with the Saudi-Russian plan – as per the aforementioned late-night phone calls.
So, here we are another two years later, in mid-2018: the Russia-Saudi, or OPEC/NOPEC combo has finally gotten the previous global oil glut and low-prices somewhat under control. Aided by growing global demand for oil, their cuts have gotten storage in the USA and elsewhere down, and they have gotten lucky as long as US shale producers face temporary limits on getting their rapidly growing production to market for a lack of pipeline capacity to USA ports.
Now that they’ve begun to get some leverage over prices, Russia and the Saudis want to reign in prices from overheating. At the same time, they have to make up for the death spiral in production caused by the Chavez- and Maduro-led collapse of the Venezuelan oil industry, and an expected decline in Iranian exports due to the Trump administration’s campaign to impose the “strongest sanctions in history” (Sec. of State Pompeo).
Although low investments (low CAPEX by both IOCs and NOCs) over the past few years means there is disconcertingly little spare production capacity in OPEC – or in Russia for that matter, where the effects of US and EU sanctions over its Ukraine adventures have also taken a toll – nevertheless, a production increase of perhaps a million or 1.5 million barrels per day (bpd) seems to be both reasonable and the actual Russian-Saudi goal.
So, my comments to Ms. Rich at IBD concern the likelihood that Putin will have some influence once again in getting the Iranians on board this plan. Iran, Iraq and Venezuela are three OPEC states in the “price hawk” faction (AKA, the “high absorber” faction) who face difficult economic and financial situations (dire, in the case of Venezuela) and very much want to keep prices up.
In Tehran’s case, they look to Putin and Russia right now as both a needed ally as one which might very soon betray them. While Tehran and Moscow have been allied in Syria and in some other matters, Putin clearly welcomes the present US-Israeli demand to get Iran away from the Israel’s border with Syria, and to get Iran out of Syria altogether, if possible. With the fighting inside Syria essentially over, Putin’s Iranian allies there have come to carry much more weight on the ground, both economically as well as militarily, and their interests in arming Hezbollah in Lebanon with sophisticated missiles only complicates his relationships with both Israel and with Assad – also diminishing Assad’s need to rely on Moscow.
Meanwhile, the tearing up of the JCPOA nuclear accord between Iran and the US (and its EU allies) by Mr. Trump, together with the US-Israeli plan to severely isolate Iran via sanctions and push it back from its positions in Syria, Lebanon, Yemen and elsewhere, have raised the spectre of an existential crisis for the government of mullahs in Tehran. This means, that Russia, which is Iran’s only Great Power ally able to exert any significant hard-power influence in the Mideast, carries significant weight in influencing (and cajoling) Tehran to support the present oil-production boosts that Moscow and Riyadh desire.
However, as I further explained (and as I am sure the mullahs in Tehran realize in stark terms): Putin has a long history of getting close to the Iranian leadership and in that way becoming a player with considerable geopolitical capital in the region. How will he spend this geopolitical capital?
At least three times previously, when US presidents wanted to impost “crushing” or “severe” or whatever types of sanctions on Iran, Putin realized that, although Russia is geographically and geostrategically in a unique position to be able to thwart any US (or EU) sanctions regime on Iran, he had no capacity to fundamentally undo the US project without incurring great costs. And, so, in each case he decided to sell out the Iranians and support the US/EU/UN sanctions regime of the day.
But, Putin never did this without getting a very good price for his support. In one case, the quid-pro-quo involved President Obama removing the US strategic missile defense system from Poland which Putin and his generals saw as a major threat to Moscow; in another instance one President Bush supported Moscow’s entrance in the WTO, and in another case the other President Bush gave approval for US nuclear fuel rods being used anywhere overseas need not be returned to the USA for reprocessing, but could henceforth be reprocessed by Russia – a multi-billion dollar enterprise.
In my view, the present warning by the Trump White House to put sanctions on the Russia-German Nord Stream 2 pipeline project — after specifically promising the companies and countries involved, late in 2017, that it would not do this — is one major element of the current US president beginning to ‘horse trade’ with Putin to get him to once again abandon his Iranian ‘allies’ as have three presidents who came before him.
However, in the interim, the Iranians are likely to want to make Putin happy by going along with the present OPEC cuts, to maintain some influence with Moscow in hopes of thwarting yet another chronic betrayal by Moscow of their hegemony-seeking interests in the Mideast region.
The latter two paragraphs involve speculation, a projection from past ‘data’ points. Links to some related previous posts follow. – Tom O’Donnell
(Corrected spelling and MbS initials, 19jun18)
An Oil-Price War´s Surprise Ending -My BPJ article on OPEC, Shale, Trump, Market & Geopolitics November 30, 2016
Several more here at GlobalBarrel.com