Is Saudi trying to kill two birds
with one stone?
T.Mukhopadhyay
30 March 2015, Barmer
[One important feedback I got from my previous articles is that they have to
be more layman-friendly and less newspaper-ish. So here I have attempted to
keep this simple and interesting, so that it is understood by all and sundry]
The Game:
What could be
the reason for Saudi to launch an air attack on Yemen?
The straight
story goes like this:
Yemen is ruled
by President Abedrabbo Mansour Hadi, and the Muslim population belongs to the
Sunni group. However, there's a rebel group, sizable in number, who are known
as the Houthis and are Shi’ites. The Houthis get full backing and funding from
their neighboring Iran. [1]This
rebel group is on the verge of overthrowing Hadi.
The religious
insurrection between the Shi’ites and the Sunnis is well known, which is precisely the bone of contention between Iran and Saudi.
That Saudi will
hate the Houthis in Yemen is, therefore, axiomatic. But the timing of the bombing
and creating a warzone in Yemen is interesting.
Why now? It
could have started long before. After all, the rebel Houthis have been trying to oust
President Hadi and assume power for long…
This is where
the story can be viewed from a different angle.
To understand
this, we must delve a little into the recent fall in Oil prices and its effects
on a few Nations, particularly the OPEC nations and the US.
OPEC is a collection
of oil-producing nations that pump out about 40 percent of the world's oil. In
the past, this cartel has tried successfully to influence the price of oil by
coordinating either to cut back or boost oil production.
Then the Shale
Oil boom happened. Also, Russia boosted its production to 10 MMBPD – which is
about the same as the Saudi. The oil supply surpassed demand, and price plummeted (covered in my article: “The Fall and Fall
of Oil Price” dated 30 November). At its big meeting in Vienna on November
27, there was a lot of heated
debate
among OPEC members about how best to respond to the drop in oil prices. Some
countries, like Venezuela and Iran, wanted the cartel (mainly Saudi Arabia) to
cut back on production in order to prop up the price.
To understand this, we need to have
a look at the “breakeven price” for the oil. Now this is not just the
break-even price for producing the oil. I am talking of the break-even price
for the country’s economy to sustain, that is the "break-even" on
their budgets and pay for all the government spending they've racked up. Have a
look at the following graph:
[1] The Houthis, who follow the Zaydi branch of Shiite Islam, say they operate independently of Iran and represent only their group's interests.
So we see Iran needs the oil priced
at $131, while Saudi itself needs $104 per barrel for the oil it exports! (This
is not same for countries like US, India or Japan – where economies are not oil
or hydrocarbon dependent – but that is beyond today’s topic.)
Yet Saudi’s Oil Minister, Mr Niami,
shot down the proposal to reduce production and increase oil price in the 27
Nov 14 meet in Vienna. There's
no question that Saudi Arabia, the world's second-largest crude oil producer (after
Russia), will suffer financially from cheap oil. If oil stays at around $60 per
barrel next year, the government will run a deficit equal to 14 percent of the GDP.
It’s all very fine for Saudi for
now since the
kingdom has built up a stockpile of foreign currency worth some $750 billion,
which it will use to finance its deficits. The question is, how long? What is the
alternate way to push oil price up, other than closing down own oil-taps?
For now, however, the
Saudis are toughing this out and show no sign of trying to prop up prices as
they have in the past. In December, the country's oil minister, Ali al-Naimi, said
he didn't care if prices crashed to $20 or $40 per barrel, his country wasn't
going to budge from its position. "It is not in the interest of OPEC
producers to cut their production, whatever the price is," he said.
That said, if low oil
prices persist, Saudi Arabia may have to cut back on some of the social
programs it instituted after the Arab Spring. And Naimi's strategy of
maintaining oil output is controversial within the kingdom. (In January 2015, Saudi King Abdullah
died, but his successor Salman said
he would maintain the current oil policy.)
But what he never talked of is the
air-strike on Yemen!
Could this be a ploy
to raise the oil price without actually cutting OPEC production, thereby
killing two birds with one stone? Bring the oil price up, and also teach the
rebel Houthis (Shi’ites – backed by Iran) a lesson!
Sound preposterous?
To understand this, we
need to have a look at Yemen and its geographical location.
Yemen
contributes less than 0.2% of the global oil output. So, it's bombing by Saudi will
not have any significant effect on the world oil production and price. But its
geography is why the bombing becomes strategic! Its location puts it near the center
of world energy trade.
One look at the map of Yemen and
adjoining nations and you shall understand!
The nation shares its northern
border with the world’s biggest crude exporter, Saudi Arabia. Towards the south, it’s open to the Arabian Sea, sitting on one side of a shipping chokepoint used
by crude tankers heading west from the Persian Gulf. Global oil prices jumped
more than 5% on 26 March ’15, after regional powers began bombing rebel targets.
Strategically, Yemen, therefore,
is a shipping chokepoint!
Yemen is located on Bab
el-Mandeb, the fourth-biggest shipping chokepoint in the world by volume.
According to the EIA (US Energy Information Administration), 3.8 million barrels of oil and petroleum passed through this in 2013. Its closure may keep
tankers from the Persian Gulf from reaching the Suez Canal and the SUMED[1]
Pipeline, diverting them around the southern tip of Africa, adding to transit
time and cost, the EIA said on its website.
The Suez Canal and the SUMED
Pipeline serve as the link between Egypt's ports of Ain Sukhna on the Red Sea
and Sidi Kerir on the Mediterranean. According to the EIA, tankers carrying oil
from Europe and North Africa won't be able to take the most direct route to
Asian markets if the Bab el-Mandeb strait is shut.
I am lifting quotes from several industry
experts on the effect of air strikes on Yemen and its strategic geographical
importance.
1) John Vautrain,
who has more than 30 years' experience in the energy industry and is the head
of Vautrain & Co., a consultant in Singapore: "While thousands of barrels of oil from Yemen will not be noticed,
millions from Saudi Arabia will matter"
2) Ric Spooner,
Chief Strategist at CMC Markets, Sydney: "Yemen
is not an oil producer of great significance but it is located geographically
and politically in a very important part of the Middle East."
3) Theodore
Karasik, an independent geopolitical analyst, said from Dubai: "As the situation in Yemen has dramatically
escalated, it's seen primarily as a threat to international shipping and oil
transport,"
Net
Result?
Brent[2],
the benchmark grade for more than half the world's crude, gained as much as
$3.23, or 5.7%, to $59.71 a barrel in electronic trading on the London-based
ICE Futures Europe exchange on 26 March 15. West Texas Intermediate futures,
the US marker, jumped 5.6% to $51.98 on the New York Mercantile Exchange. In
India, the SENSEX fell over 600 points!
So can we now
conclude with some conviction that Saudi is killing two birds with one stone?
Black Swan Event:
One of my
readers[3], after
reading my previous articles, labeled the Oil Price Prediction as the Black Swan
Event. It cannot be more apt! ‘Black Swan Event’ by definition is an event or
occurrence that deviates beyond what is normally expected of a situation and
that would be extremely difficult to predict. This term was popularized by
Nassim Nicholas Taleb, a finance professor and former Wall Street trader. The
"black swan theory" refers only to unexpected events of large
magnitude and consequence and their dominant role in history.
In a Black Swan
event, one always gets wise on hindsight and then starts rationalizing it
through analyses and theories.
Share Market is
one classic example.
Oil price
prediction is another, probably bigger, example that leaves a bigger and lasting
impact on the world economy.
In my second article [Further fall in Oil Price looms large: The
Iranian and Russian Connections, dated 24 March 15], I tried to predict a further fall with the lifting of Iranian Sanctions. And within two days, the Yemen
attack caused the oil price to rise...
Bibliograph:
1)
Google
2)
Newspapers.
3) Internet – what
else…
[1] The SUMED pipeline (also known as
Suez-Mediterranean pipeline) is an oil pipeline
in Egypt,
running from the Ain Sukhna terminal on the Gulf of Suez
to offshore Sidi Kerir, Alexandria
on the Mediterranean Sea. It provides an alternative to
the Suez Canal
for transporting oil from the Persian Gulf
region to the Mediterranean.
[2] For the benefit of my readers
who are NOT from oil background, I have included Attachment 1 wherein all the
important crude baskets used for benchmarking and oil pricing are listed. Have
a look.
[3] Mr Ranjan Mazumdar – thanks
Ranjan.
Attachment
1
|
Sr No
|
Benchmark Crude
|
Properties
|
Traded at
|
|
1
|
West Texas Intermediate (WTI), also known as Texas light sweet
|
API gravity of around 39.6 (specific
gravity approx. 0.827). It contains about 0.24% sulfur, rating it a sweet
crude, sweeter and lighter than Brent.
|
New
York Mercantile Exchange (NYMEX)
|
|
2
|
Brent Crude is a major trading classification of sweet light crude oil that serves as
a major benchmark price for purchases of oil worldwide. Brent Crude is
extracted from the North Sea and comprises Brent Blend, Forties Blend, Oseberg and Ekofisk crudes (also known as the BFOE Quotation). The Brent Crude oil marker is also known
as Brent Blend, London Brent and Brent petroleum.
|
Brent Crude has an API gravity of around
38.06 and a specific gravity of around 0.835. Sweet, but less than WTI
|
It was originally traded on the open outcry International
Petroleum Exchange in London, but since
2005 has been traded on the electronic Intercontinental
Exchange, known as ICE. One
contract equals 1,000 barrels (159 m3). Contracts are quoted in U.S. dollars.
|
|
3
|
The OPEC Reference
Basket (ORB), also
referred to as the OPEC Basket is a weighted average of prices for petroleum blends
produced by OPEC countries.
|
ORB
is a mix of light and heavy crude, but it’s heavier than both WTI and Brent
|
|
|
4
|
Dubai Crude is a medium sour crude oil extracted from
Dubai. Dubai Crude
is used as a price benchmark or oil marker because it is
one of only a few Persian Gulf crude oils available immediately.
|
The Dubai benchmark is also known as Fateh
is used in the United Arab Emirates.[1] Forward trade of Dubai Crude
is limited to one or two months.
|
|
|
5
|
Tapis crude is a Malaysian crude oil used as a
pricing benchmark in Singapore. The price of Tapis in Singapore is often
considerably higher than the price of benchmark crude oils such as Brent or
WTI (those commonly referenced in market commentaries). This is because its
greater aromaticity (i.e. higher ° API) allows for greater production of
higher-value products (such as gasoline) from Tapis than Brent or WTI.
|
While it is not traded on a market like Brent Crude or West Texas
Intermediate (WTI), it is often
used as an oil marker for Asia and Australia.
|
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