Oil Wars 2016 - US vs Russia vs Saudi Arabia vs IranCommodities / Crude Oil Jan 15, 2016 - 08:36 AM GMT
The oil price collapse is having a devastating impact on ALL of the worlds major oil producers as it's not just a case of what is the break-even price but the price necessary to finance government budgets that are now in deep deficits which has been triggering increasing global instability as the price has slid to $30. In fact the budgets of virtually every major oil producer requires an oil price north of $80 just to break-even. With several such as Russia requiring $100+. Furthermore the oil price slump of 2015 has played a large part in sparking economic mass migration out of African oil producers such as Nigeria whose government requires an oil price of $120 to balance it's budget.
Russia - $110 Government Budget (52% of revenues), $20 Break even
Russia, the worlds third largest oil producer and second largest exporter remains in war, war mode so as divert the attention of the Russian people away from an economy in meltdown as Czar Putin turns his military ambitions far beyond the Ukrainian war zone by expanding his military operations into Syria under the cover of fighting jihadists when the truth where Russia is concerned has always been one of first countering the U.S. Military Empire and secondly to undermine the European Union at every opportunity that has always been seen as the two real threats to the Russian Empire and not some high on religion fanatics roaming the Syrian desert. Thus Russia's war in Syria is primarily concerned with doing damage to the European Union and Secondly undermining the U.S. presence in the region.
To illustrate the crisis that Russia faces is the fact that Russia requires an oil price north of $110 to balance its finances and for every $1 below $110 Russia loses an estimated $2billion in revenues, worst still is that the Russian industry needs an oil price of $20 just to break-even which could be hit this year. With crude oil currently trading at $30 that's a a huge revenue loss of well over $160 billion per annum that has plunged the Russian economy into recession for the whole of 2015 that looks set to further intensify during 2016 as Russia's hard earned foreign currency reserves look set to have completely evaporated before the end of 2016. Whilst the cowering in fear population may be calm today, however if the oil fails to recover or worse dips to as low as $20, then Russia is in for a perfect storm of a totalitarian state on the edge of a major civil revolts as the population panics, prompting troops on the ground Ukraine style.
China - $30 break even
Most will be unaware that China is the world's fourth largest oil producer, though all of it is for domestic consumption and even more is imported. The economic slowdown in China is one of the primary drivers for the collapse in the global oil price which is also making itself felt in the global stock markets. So whilst lower oil prices should act to support the Chinese economy, other drivers such as over capacity far surpass the low oil price stimulus that shows no signs of recovering for much of 2016. In fact low oil price will be hurting Chinese producers and refiners just as badly as western oil majors, that likely are already being propped up by the Chinese government which means despite being a heavy consumer, China also needs an oil price floor of about $40 below which the pain tends out weigh the gain. So China does not look set to spark a fundamental turn around in crude oil demand for much of 2016.
In terms of instability, a weak economy is likely to further encourage the Chinese Empire emboldened by a new fleet of air craft carriers to continue to assert its dominance over the asian region the most evident example of which is the construction of artificial islands on reefs in the South China Sea an area claimed by several other nations including the Philippines and Malaysia that could prove a flash point between U.S. and Chinese vessels.
Iran - $70 Govt budget, $25 break even
The continuing thawing of Iran / U.S. relations implies the potential for an huge increase in the supply of oil out of Iran which has the worlds fourth largest oil reserves and second largest gas reserves. Whilst it will take the whole of 2016 for Iran to ramp up production by even another 1m b/d. However a more immediate supply boost will likely come from the release of 50 million barrels of oil in storage for the hoped for economic boost which is fast evaporating given an oil price of just $30, which is well below the minimum of $70 required for Iran to cover government spending.
Lifting of sanctions means that even if Iran does not actually turn on the taps, just the ability to do so at anytime will be enough to keep oil prices depressed for virtually the whole of 2016. Especially given the internal and external pressures pulling on Iran to raise more revenues such as the Iran's proxy wars against Saudi Arabia in Syria and Yemen whilst at the same time retaining its influence and network of control over Shia Iraq.
Saudi Arabia - $100 Govt Budget (85% of revenues), $10 break-even
Those who have been looking to Saudi Arabia for signs for a cut in production have been greatly disappointed as instead Saudi Arabia has ramped up production to 10.2m b/d compared to 9.6m b/d a year ago and thus further contributing to the worlds crude oil glut that is seen by much of the media as part of a 'War on U.S. Shale oil industry' aimed at annihilating competition such as that from the fracking industry. However, despite $620 billion of reserves most of which is parked in its sovereign wealth funds, Saudi Arabia is not immune to the instability triggering consequences of the oil price collapse which is seeing Saudi Arabia's wealth disappearing at the rate of about $100 billion per annum as the Kingdom is reliant on oil exports for 85% of its revenues.
In fact rather than reigning in government spending, Saudi Arabia is engaged in two costly major proxy wars against Iran in Syria and Yemen and each passing day brings increasing risks of a hot war between Iran and Saudi Arabia that would probably trigger at least a temporary speculator driven spike in oil prices.
So rather than Saudi Arabia using oil prices to kill off the competition the real story is more of a totalitarian state being destabilised by the oil price collapse that is fighting multiple proxy wars and an internal insurgency, as it should not be forgotten that Saudi Arabia is a family dictatorship that is only able to retain power by means of terror and bribery of ordinary Saudi citizens with oil money that is fast running out of. So in the grand scheme of things the U.S. shale industry is way down on the priority list of worries for the Saudi totalitarian regime.
The reality of the Saudi Arabia is one of a regime that is rotten to its very core, that literally has hundreds of wannabe Al-Saud Saddam Hussain types running around trying to stoke the fires of sectarian conflict both in neighbouring states and within Saudi Arabia itself, who are increasingly wielding power against a fragile centre that sows the seeds for what is unthinkable today that of a revolution or even civil war, let alone the possibility of a hot war against Iran.
Given the fact that Saudi Arabia has not cut oil production to date is very telling, in that it shows that the Saudi totalitarian Islamic fundamentalist state fears three things -
1. It's people
2. I's oil becoming obsolete / worthless as a consequence of new renewable energy sources prompted by climate change.
3. Anything Shia, which the Saudi wahabi ideology perceive as apostates.
Which means no matter how loudly other OPEC members scream at Saudi Arabia to cut production, it's just not going to happen, in fact I would not be surprised if we find out in a few months time that Saudi Arabia has further INCREASED production in an attempt to monetize the oil in the ground whilst it still has customers for it and ahead of Iran opening the taps.
This illuminates why Saudi Arabia this week announced intentions to put its oil industry (Aramco) on sale, which is because it understands that the nations 266 billion barrels of oil in the ground could become worthless long before it can be produced and sold, so instead are trying to forward sell Saudi Arabia's oil reserves to clueless investors.
By the end of 2016 some of these Al-Saud wannabe Saddam Hussain's will have made enough of a name for themselves so as to make it into the mainstream media as they leave their finger prints as the instigators of regional instability through extreme acts of violence of which the recent executions were just a taste of what is to follow.
Iraq - $80 budget, $12 break even
Iraq still desperately trying to rebuild its devastated cities after the U.S. and allies went on a decade long rampage across the nation all on the basis of lies such as that its was for 9/11 or that there were weapons of mass destruction ready to hit europe within 45minutes, the consequences of which still continues plague Iraq to this day which remains a divided nation of between Sunni's and Shia's. After America's departure the one hope that Iraq had towards building a better more stable future was Iraq's huge oil reserves which given a price of $100 would be more than enough for the central government to paper over the cracks and buy off the various competing factions with petro dollars.
However, again despite a low break even price of $12, $30 is just not enough to meet the requirements for a fragile Iraq which implies that 2016 could turn out to be just as bad a year for Iraq as was 2015, as the factions such as the Kurds, and various Sunni and Shia militias attempt to seize control of the oil producing regions resulting in continuing sectarian warfare. In fact the Kurds by the end of 2016 could come to be seen in a similar manner as ISIS is today, as Kurdistan seeks to control Iraq's northern oil fields and take all of the revenues from themselves therefore risking a Shia Iraq / Kurd war.
United States - $65 break even
The consensus view in America is that Saudi Arabia is engaged in an oil war to knock out America's shale oil industry. However, when one looks at the facts the reality is more like the US oil war on Saudi Arabia as evidenced by the fact that it is the United States which has effectively doubled its oil production over the past 10 years from 4.5 million barrels a day to over 9 million today that virtually rivals that of Saudi Arabia which is producing little more than it was 10 years ago (10.2 against 9.7 10 years ago).
This view whilst obvious remains invisible to a propaganda driven mainstream press that instead of reflecting reality instead peddles and regurgitates the view that it is all Saudi Arabia's fault.
The U.S. shale oil production peaked during 2015 at approx 5.7 million barrels per day and today has declined to 5.15 million barrels a day, with expectations for the decline to steepen during 2016 in response to a sustained low oil price resulting in a bloodbath amongst the US shale oil industry that could kill off half of the industry this year leaving output at least 2m b/d lower at approx 3m b/d. Therefore US total oil output could fall to approx 7m b/d by the end of 2016. Whilst the majors should fair better having locked in prices for multiple years as high as $60, nevertheless will be scrapping hundreds of billions in exploration and drilling projects during 2016 resulting in further job losses.
So on the basis of fundamentals there is little sign for an end to low prices any time soon as it will be slow grinding process of wiping out approx half of the US shale industry which is the only peaceful method of bring price stability to the oil market. Which means any bottom in the crude oil price is unlikely to spark a return to anywhere near the likes of $100 with a real risk that the crude oil price could sink even lower, as given these fundamentals $20 is very possible (60% probability), and whilst today it is difficult to imagine the oil price trading as low as $10 as some suggest (Standard Chartered), nevertheless it is no longer impossible (20% probability).
War is Coming!
The bottom line is a sustained low oil price far below levels necessary to finance government budgets means that something major is going to give during 2016 where not even the likes of Russia or Saudi Arabia or Iran are immune. The current trend is towards an escalation of the conflict between Saudi Arabia and Iran. However, either one of these totalitarian nations may implode into civil war during 2016 much as we have seen with Syria and Libya during the past few years. And even Russia is not immune to such a fate, which I am sure has many western intelligence agencies busy trying to engineer Russia's demise much as Russia is busy trying to disrupt the European Union and American influence in its bordering regions.
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By Nadeem Walayat
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Nadeem Walayat has over 25 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis focuses on UK inflation, economy, interest rates and housing market. He is the author of five ebook's in the The Inflation Mega-Trend and Stocks Stealth Bull Market series that can be downloaded for Free.
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