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OPEC BEARS THE PRICE OF US-CHINA TRADE DISPUTE

OPEC member states are bracing themselves for a bleak bearish outlook in the short term despite their best efforts to support crude oil benchmarks with supply cuts. The bearish outlook is due to an anticipated slow down in global growth amid the U.S.-China trade dispute with a no-deal Brexit further weighing heavily on bearish sentiment. In the event that the trade dispute remains unresolved it is highly likely OPEC+ will be moved to extend the production cuts into 2020. OPEC have stated their determination to ensuring the market is balanced and stated they will be closely monitoring the market in the coming months in an effort to maintain market price stabilty.

OPEC stated in their most recent report that their policy to support prices through supply cuts has been giving a sustained boost to U.S. shale and other rival supply, and the report suggests the world will need less OPEC crude next year. The demand for OPEC crude is forecast to average 29.41 million bpd next year, OPEC said, down 1.3 million bpd from this year. Still, the 2020 forecast was raised by 140,000 bpd from last month’s forecast. OPEC reported its oil output fell by 246,000 bpd in July to 29.61 million bpd with the Saudis making deeper cuts than its quota under the agreement (9.58 million bpd). This still puts OPEC production above the 2020 demand forecast. The report suggests there will be a 2020 supply surplus of 200,000 bpdin the unlikely event that OPEC keeps pumping at July’s rate and other things remain equal.

The global balance of supply and demand is tighter than it appeared a month ago. OPEC raised its assessment of consumption for this year and next by 50,000 barrels a day, and trimmed projections for non-OPEC supplies by 40,000 barrels a day for 2019 and by 90,000 a day for 2020. Consequently though oil inventories in OECD nations have risen above 5 year average levels, global stockpiles should decline this quarter by an average of 2.1 million barrels a day. OPEC is pumping about 29.6 million a day, compared with a daily requirement of 30.28 million.

Crude prices have fluctuated this week, caused by the fractious events between Washington and Beijing as President Donald Trump imposed 10% tariffs on $300 billion of Chinese imports. A Saudi official speaking anonymouslyintimated that the Saudis had sounded out its partners on potentially stepping up their efforts and are open to all options. The Saudis, Russia and other key members of the coalition will meet to review their strategy in Abu Dhabi on Sept. 12. Nobody in OPEC wants to see sub $50 oil

As Donald Trump’ presidency unfolds, he continues to discover artful mechanisms of how to apply his authoritarian instincts to the constitutional power he possess.  His sole objective to circumvent  constitutional restrictions which foil his ability to operate as Putin or MBS to his benefit and to the detriment of others. An increasing number of events has recently revealed just how Trump is accruing authority, abusing his power, threatening to violate the law, thwarting the checks on his office, and undermining US institutions empowered by by Congress.

 

China have been labelled currency manipulators by an acquiesent and previously rational US Treasury department full in the knowledge that the recent depreciation of the yuan below the historical benchmark of 7 to the US$ was neither an act of intervention by the Peoples Bank or met the firmly established criteria for currency manipulation. The task of evaluating currency manipulation is the sole preserve of US Treasury Departmentand its decision to label China a manipulator has weakened the credibility and robbed the US Treasury Dept of its proffessional integrity. It is yet another example of Trumpian destruction of established rules of engagement, most of which were authored or sponsored by the US.

For a little over a decade from 2003 China kept the renminbi substantially undervalued. The Chinese authoriy's policy was to frequently intervene to slow down the currency’s market-driven appreciation. During this period the renminbi still appreciated by over 30% against the US dollar. It is that period which has been used by the Trump Administration to create the myth which if oft repeated and endorsed by US institutions seems to morph into an a priori truth. The facts establish a very different narrative. The Chinese actively intervene to slow downthe depreciation of the currency. In 2015 and 2016, the People’s Bank of China spent in excess of $1 trillion in foreign-exchange reserves in an effort to prop up the exchange rate – by far the largest intervention in history to support the value of a currency.

After a year of being barracked, pestered and threatened Jay Powell the Chairman of the Federal Reserve finally caved in to Trump's demand to reduce interest rates. Trump was unimpressed. Though the move was widely anticipated it was universally regarded as uneccessary. Powell stated the rate cut was to ward off down side risk but with unemployment low, consumers still spending and the stock market doing well the only possible downside risk is the global economic slow down provoked by Trumps own policies. He went on to explain further "The ongoing uncertainty is making some companies more cautious about their capital spending,”. He also cited weak manufacturing and business-investment data a coded subliminal dig at Trump's 2017 tax cuts which were supposed to boost these sectors.

Lowering the target range for the benchmark rate a quarter point to between 2% and 2.25% was the very least the Fed could do in capitulating to Trumps demands whilst limiting the risk of igniting inflation or creating asset bubbles caused by expanded corporate borrowing ( though inflation is still below the FOMC 2% target). But it also announced the premature end of quantative tightening (QT) without achieving its stated objective of reducung the Fed balance sheet to $3.5 trillion down from $4.5 trillion.

These actions lead to legitimate questions about the FOMC's independence and are a further example of President Trumps policy of compromising the integrity and undermining the ability of the institution to act imdependently and without undue political inteference. The essence of the Trump Administration is an authoritarianism of the sort which conflates genuine policy differences with loyalty to the President. A President that is busy damaging the long term inyerests of the United States globally.

Whilst large European oil companies have resisted every attempt by the EU to get them to engage with the INSTEX mechanism to trade with Iran, China has no such compunctions. The New York Times recently published an article, after  claiming to have received  information from multiple sources alleging  that China has been receiving oil shipments from a larger number of Iranian tankers than was previously known.

Historically China imported about 500,000 bpd, though in recent times it has been set at about 360,000 bpd. But it is difficult to arrive at a definitive figure.

The Trump Administration has already imposed sanctions on Zhuhai Zhenrong, a Chinese state-owned enterprise, and its top executive Li Youmin, But in all reality it will have to impose sanctions on the Peoples Bank of China which I unlikely

US sanctions are not legal just another example of  them  asserting extra territorial jurisdiction. China had made it very clear that US sanctions regime would not determine their strategic or commercial interests. But to hear American politicians speak you wouldn’t think so. Senator Marco Rubio said  "While I'm glad the administration sanctioned an initial round of Chinese actors, it must step up strong enforcement to deter Chinese and other foreign actors from violating US sanctions against Iran," He went further "The Iranian regime has blatantly shipped millions of barrels of oil to China."

A Chinese Foreign Ministry spokesman,  Geng Shuang, said on July 19 that the Trump administration's "maximum pressure" campaign against Teheran was the "root cause of the current tensions" involving Iran and that Washington should "correct its wrongdoing" . He had earlier gone further “The U.S. is operating outside its jurisdiction in unilaterally imposing the sanctions”

The  unanimous UN Security council resolution 2231 underlines “promoting and facilitating the development of normal economic and trade contacts and cooperation with Iran” as an essential part of the JCPOA and calls upon all member states to support its implementation, including to ensure Iran’s access in areas of trade, technology, finance and energy, and refrain from actions that undermine it.

The US  undertook to refrain from any policy intended to directly and adversely affect the normalisation of trade and economic relations with Iran. Yet a rampaging Trump motivated by his pathological urge to repudiate anything previous President Obama did has set the US on course for conflict with Iran. But he needs a Western ally to form a coalition. Cue John Bolton the NSA and his trip to the UK. He has come to recruit Boris and drive a wedge between a Brexit bound UK and the EU. He will urge the UK to re-align its position on Iran with the White House. As the UK seeks to find a place in the world post brexit the hard Brexit Tory government will be susceptible to an American overture. I would not be surprised in the coming weeks to see a flottila of UK/US naval vessels steaming through the Straites of Hormuz.

Monday, 12 August 2019 12:24

US SHALE THE PONZI OF OUR TIME

 US Shale has become the Ponzi scheme of our times. How much longer can it survive and in what guise?. The long term financial viability of shale amid another dreadful slew  of earnings reports that have come out over the last couple of  days is in a state of  dire qualm. these setbacks whilst not entirely unexpected  have yet again staggered the industry   and sparked a share price collapse which has  seen what appears to be a terminal loss of investor confidence. Shale has been pounded by a series of poor financial results from several drillers at a time when the oil outlook is significantly deteriorating.

 According to the Wall Street Journal and Wood Mackenzie, a random basket of 7 shale drillers posted a combined $1.58 billion in negative cash flow in the first quarter, four times worse than the same period a year earlier. The trend is far from reassuring against the backdrop of an industry that has run up almost $300 billion in negative cashflow.

 Last week, Concho Resources admitted they had failed in a gamble to increase capital efficiency, an experimental  23-well project, suffered poor results because the wells were packed too closely together. The company’s share price plunged by more than 22 percent and profits have fallen by 25% despite production increases. It is becoming increasingly obvious to  investors  that  Concho Resources, and other shale drillers like it, are unable to produce as much oil as expected from a given level of spending. Concho was valued at more than $23 billion as recently as the spring of 2018 and having since acquired the $7.6 billion purchase of RSP Permian Inc., now has a market cap of less than $16 billion.  Concho has now conceded that it will  slash spending and slow the pace of drilling in the second half of the year.

 At the start of  the  year the company had 33 active rigs. In the second quarter that fell to  26 rigs , it now has  18.  tim Leach the companies CEO said “We made the decision to adjust our drilling and completion schedule in the second half of the year to slow down and not chase incremental production at the expense of capital discipline,” . He went on further in seeking to reassure investors that the company is  aiming for “a free cash flow inflection in 2020.” His comments can only be interpreted as further confirmation of the inherent implausibility of shale economics.

 Whiting Petroleum had an even worse week. Its stock melted down on Thursday, losing over a third of its share value  after reporting a quarterly loss that was  far  lower than forecasts. The company announced that it would cut its workforce by a third and scale back its production targets for the year.

 For Whiting, the elimination of 254 jobs is estimated to  result in $50 million in annual cost savings. Chief Executive Officer Brad Holly said in a statement  “We aim to be as efficient as possible and that is why we made the difficult decision to reduce our workforce in order to realize significant annualized cost savings,” . Which begs the question as to why the company has hitherto operated with excessive staffing costs. Whiting joins joins other shale drillers  Pioneer Natural, Laredo Petroleum Inc and Devon Energy Corp. in drastically reducing  headcount as investors increasingly focus on general and administrative budgets with Executive compensation can amount to as much as 20% of general and administrative costs.

 

Add Oasis Petroleum, which plunged by more than 30 percent on Wednesday, after the company said it would probably spend a little bit more than previously expected, and might produce a little bit less. The Shale narrative could not be clearer. At current global oil prices it cannot be profitably produced and the more produced the lower  the global market price drop.

 

  Pioneer Natural Resources  President and CEO Scott Sheffield one of the larger producers in the Permian and widely considered one of the stronger companies, warned about the future of drilling. “Rig count and Tier 1 acreage is being exhausted at a very quick rate,” he told analysts on an earnings call on August 6, referring to the Delaware basin, which has seen a surge of activity most recently.

 “I am lowering my expectations of the Permian, reaching 1 million barrels of oil per day growth annually as it did in 2018,” Sheffield said. “I'm still convinced the Permian will reach 8 million barrels a day at a much slower pace with the Midland Basin as the only growing basin in the U.S. past 2025.”

 The prediction echoed that of Goldman Sachs, which said that the poor results from Concho Resources regarding well density could be a harbinger of broader problems with the future of shale. That would likely mean WTI would be under $50, which he says is just too low for shale companies to be making money. If oil was stuck at those low levels, you would “see a significant fallback in Permian growth,” Sheffield told investors.

 Just a the time President Trump decided to slap on a 10% tariff on all Chinese imports to the US and further weaken sentiment in crude oil markets by pushing the long term outlook bearish. Despite OPEC's best efforts to drain global crude inventories, they are at a record high. The market is fully able to absorb any short term supply shocks created by any geopolitical infraction. The US-China trade war will damage global economic growth and the call for crude oil. It now seems far more likely that the deal maker in Washington is more likely to face a recalcitrant China prepared to deepen and broaden the trade dispute. That is bad new for global energy stocks but dreadful news for Shale. Global benchmarks have lost over 20% since April highs and the reduction in demand forecasts could see WTI dropping beneath $50 per barrel in September.

 I have long argued the fundamental characteristics of shale production, the need for high capex to maintain production rates, the failure to generate positive EROI and the inability to generate free cashflow to compensate bond holders or equity participants will consume the  industry. The true cost of profitable shale production now sets the floor for conventional oil prices as it will increasingly mark the point that shale drillers can no longer operate.

 

 

 

 

 

 

 

It came as no surprise when the US announced sanctions on Zhuhai Zhenrong, a Chinese state backed enterprise which was set up 25 years ago as the sole importer of Iranian crude to China. Beijings response was swift and equally predictable " “We oppose the bullying and sanctions by the US of China’s enterprises and individuals based on US’s domestic laws. We strongly condemn and firmly oppose sanctions on related Chinese companies by the US.”. Zhuhai Zhenrong will be barred from engaging in foreign exchange, banking or property transactions under US jurisdiction, as will its chief executive, Youmin Li
Data obtained from Chinese customs and cited by Reuters indicated Iran sent a bit over 208,000 bpd of crude to China in June , which was down from over 250,000 bpd in May while the waivers were still in effect.

According to Reuters ,most of the Iranian oil shipments to China in June were discharged at Tianjin, at about 163,000 bpd. Tianjin, in northern China, along with two other ports Jinzhou and Huizhou are China’s three main oil hubs. It has been difficult to assess the full extent of Chinas imports of Iranian oil as much of the trade is clandestine with vessels deactivating their transponders in an effort to evade detection.

Beijing has made it clear that they would not comply with US Sanctions unlike their E3 counterparts and signatories to the JCPOA. Sino-American relations are at their lowest point in a generation and have entered a level of mutual mistrust and suspicion not seen since the 1970s. Trump’s trade war with China has metastasized Sino-American relations. Washington is now trying to decouple and dismantle China’s interdependence with the American economy, restrict its role in global governance, counter its foreign investments, cripple its companies, block its technological advance, punish its many deviations from liberal ideology, contest its borders, map its defenses, and sustain the ability to penetrate those defenses at will. Indeed Washington now regards China as a full spectrum threat and to most Chinese Iran sanctions are an extension of that strategy.

"We're going to zero [exports of Iranian crude] and ... countries that don't abide by US sanctions will face repercussions for not abiding by US sanctions," S&P Global Platts quoted a State Department spokeswoman as saying two weeks ago. "That goes for China or any other country in the world. We expect all countries to abide by US sanctions."

Yet companies like Sinopec may continue to buy oil from Iran. The company claims to have made investments in the oil zone West of the river Karoun in Iran's Khouzestan Province. Reports say Iran owes money to Chinese companies Sinopec and CNPC for their help in developing its oil fields. Both companies have received oil from Iran. In fact part of the oil reported to have reached China in June might have gone to these companies as a payment Iran owes but more likely as a good pretext to evade US sanctions.

Iran is set to lose over $25 billion in revenues this year. As Iran has lost market share in China, Saudi Arabia has taken over the Iran’s lost oil sales. In June Riyadh boosted its exports to China by 84 percent to a total of 1.88 million barrels a day, instead of 1.1 million in May. Russia has also increased exports to China by 45 percent in June compared to the volume in June 2018.

The increases in Saudi and Russian oil exports to China are because of U.S. sanctions on Iran. But the U.S.-China trade war has reduced China’s purchase of American oil. which U.S. ally Saudi Arabia and its geopolitical rival Russia have wasted no time stepping in to fill the gap.

 

OPEC oil output hit an eight-year low in July as a further voluntary cut by top exporter Saudi Arabia deepened losses caused by U.S. sanctions on Iran and outages elsewhere in the group, a Reuters survey found.

OPEC pumped 29.42 million barrels per day (bpd) in July, the survey showed, down 280,000 bpd from June's revised figure and the lowest OPEC total since 2011.

Saudi Arabia has demonstrated recently its willigness to ignore US pressure and maintain its strategy of voluntarily restraining output by more than called for by an OPEC-led supply deal to support the market. Despite lower OPEC production global crude oil benchmarks have fallen from a 2019 high above $75 a barrel in April to $65 on Wednesday, weighed down by predictions on slowing economic growth.

OPEC, Russia and other non-members, known as OPEC+, agreed in December to reduce supply by 1.2 million bpd from Jan. 1 this year. OPEC's share of the cut is 800,000 bpd, to be delivered by 11 members with the exemption of Iran, Libya and Venezuela.In July, the 11 OPEC members bound by the agreement, which now runs until March 2020, achieved 163% of pledged cuts, the survey found. All three exempt producers also pumped less oil.

The biggest supply drop came from Saudi Arabia, which has cut supply even further below its OPEC target in a bid to reduce oil inventories. The survey pegged Saudi production at 9.65 million bpd, down from its quota of 10.311 bpd.

The United States reimposed sanctions on Iran in November after pulling out of a 2015 nuclear accord between Tehran and six world powers. In bid to cut Iran's sales to zero, Washington in May ended sanctions waivers for importers of Iranian oil. Iran's crude exports declined to as little as 100,000 bpd in July, according to tanker data and an industry source, from more than 2.5 million bpd in April 2018.

In Venezuela, supply fell slightly due to the impact of a power blackout, U.S. sanctions on state oil company PDVSA and a long-term decline in production, according to the survey. "There was a blackout on July 22 which the various fields were slow to recover from," said an industry source who tracks Venezuelan output.

Libyan production dropped due to a stoppage at the Sharara oilfield, the country's largest. Output fell in Nigeria, but Africa's largest exporter which is seeking a higher OPEC quota continued to produce above its target by the largest margin. Among countries with higher output, Gulf producers Kuwait and the United Arab Emirates both raised supply while remaining below their OPEC targets. July output is the lowest by OPEC since 2011, excluding membership changes that have taken place since then, Reuters surveys show.

The Reuters survey aims to track supply to the market and is based on shipping data provided by external sources, Refinitiv Eikon flows data and information provided by sources at oil companies, OPEC and consulting firms.

U.S. crude oil inventories fell more than expected last week, logging their seventh-consecutive weekly draw.Initial gains in a knee-jerk reaction quickly faded as bulls turned cautious ahead of the Federal Reserve’s policy decision.

The Energy Information Administration said in its regular weekly report that crude oil inventories decreased by about 8.5 million barrels in the week to July 26. That was compared to forecasts for a stockpile draw of just 2.59 million barrels, adding to a higher-than-estimated draw in gasoline inventories and an unexpected decline distillate stockpiles.

While oil prices initially jumped an additional 30 cents after the data, those gains quickly faded. U.S. crude prices last rose 0.3% to $58.21 a barrel by 11:17 AM ET (15:17 GMT), down from $58.44 prior to the publication. London-traded Brent crude futures traded up 0.5% to $64.92 a barrel, compared to $65.09 ahead of the release.

“On the surface of it, this is a whopping drawdown, coming after last week’s 11-million-barrel drop, but the follow-up price movement seems to indicate that people are still having trouble ‘buying’ the strong numbers for crude after Hurricane Barry,” Investing.com senior commodity analyst Barani Krishnan said after the report. “Or maybe they are just waiting out the Fed.”

Oil has traded higher in the last five sessions in the run-up to the Fed’s rate decision at 2:00 PM ET (18:00 GMT). The U.S. central bank is expected to cut interest rates by a quarter point in what could provide incentive for diverting capital into inflationary assets such as oil. But concerns abound that the Fed will not provide as dovish a stance as markets are hoping.

Krishnan said that if the Fed followed through with the forecast of a 25-basis-point cut, WTI could show an immediate reaction to the upside.

“But after the initial euphoria, and barring more dovish overtones from Fed Chairman Jerome Powell, the oil rally could soon run out of steam,” he warned.

il prices rose for a fifth day on Wednesday, supported by a drop in United States' inventories and investor expectations that the US Federal Reserve will lower borrowing costs for the first time since the financial crisis more than a decade ago.

Brent crude futures , the international benchmark for oil prices, were up 40 cents, or 0.6 per cent, at $65.12 a barrel by 0842 GMT. U.S. West Texas Intermediate crude CLc1 gained 20 cents, or 0.3 per cent, to $58.25 a barrel.Central bankers in the U.S. began their two-day meeting on Tuesday and were expected to cut interest rates, with President Donald Trump, reiterating his call for the Fed to make a large cut.

“The move has long been anticipated and represents a double boon for oil prices – on one hand, it should encourage U.S. oil demand and on the other, it will apply downward pressure on the dollar,’’ said PVM Oil Associates analyst, Stephen Brennock. Oil stockpiles fell again last week, along with gasoline and distillate inventories,
data from the American Petroleum Institute industry group showed on Tuesday.

Crude inventories fell by six million barrels to 443 million barrels in the week ended July 26, against a forecast for a drop of 2.6 million barrels in a Reuters’ poll of analysts.

“The outlook for another draw in U.S. crude inventories and renewed outages in Libya is supporting oil prices,’’ said UBS oil analyst, Giovanni Staunovo.

Libya’s Sharara oilfield, the country’s largest, shut down on Tuesday after a problem with a valve on the pipeline linking it to the Zawiya oil terminal. Tensions in the Middle East remain high, providing another bullish catalyst for prices, with the U.S. formally asking Germany to join France and Britain to help to secure the Strait of Hormuz after the seizure of a British tanker by Iran.

Germany has expressed scepticism about the request. BP Finance Chief, Brian Gilvary said the British company has not taken any of its oil tankers through the Strait of Hormuz since a July 10 attempt by Iran to seize one of its vessels.

Market participants are also closely watching the U.S.-China meeting in Shanghai as both countries seek to end a year-long trade war. Although, expectations are low for progress after combative remarks from President Trump, News Agency of Nigeria and Reuters report.

The meeting comes as a survey showed that China’s factory activity shrank for the third month in a row in July, underlining the growing strains placed by the trade war on the world’s second-biggest economy and one of the biggest oil consumers.

 

The catastrophic decision by the UK authorities to seize the MT Grace1 was done either as an act of malign intent by a departing Prime Minister or without thinking through the ramifications of such an action and the damage it might cause to our long term interests. Indeed it is difficult to understand how such an action could be in the wider political interests of the country.

The  implausible  fantasy propagated by  the Chief Minister of Gibraltar accepting sole and  full responsibility for the seizure of the vessel is a clear indication of the woeful logic behind the incident and calamitous  failure of UK policy decision making.

It is inconceivable that the British government would not expect retaliation from Iran in response to what is frankly a brazen act based on dubious legality. Yet it now emerges despite  alleged earlier attempt to seize ‘British flagged’ vessels, the UK were ill prepared to either  provide protection or deter Iranian retribution.

It is inevitable that the seizure of MT Grace 1 would start both Iran and the UK on an escalatory  tit for tat trajectory despite the UK governments protestations to the contrary. All this at a time the UK is seeking to assure Iran as a part of the E3 to remain in the JCPOA despite its own breach.

The decision to accede to the US request would have had to come from the Prime Minister. It has turned out to  be a very poor decision. It exposed the lack of UK naval capacity, created a divide within the E3, undermined UK’s position as an independent actor and united the discordant factions in Iran against a colonial actor long considered untrustworthy, unreliable and duplicitous.

The Foreign Minister Jeremy Hunt has now in an apparent attempt to distance the UK from the US, confusingly  announced his intention to create  a European naval force to protect shipping in the Persian Gulf. Quite which other EU nations would comprise this force remains to be determined.  It seems more likely given Whitehall’s predilection to acquiesce to Washington’s every demand, that the UK be drawn into military action against Iran as a part of a US coalition. This would achieve the US strategic objectives of terminating the JCPOA by creating a coalition against Iran.

In any event the legal basis for the seizure of the Iranian vessel is contentious and unprecedent. The vessel  was passing through  EU waters but the eventual destination of the vessels cargo was by no means certain. Despite the Gibraltar government updating  its sanctions enforcement  regulations 36 hours before it seized the tanker in an attempt it now seems clear, to provide a legal basis for detaining the vessel.  

Setting aside for a moment the question of the validity of the extra territorial jurisdiction of EU sanctions, even if the final destination of the crude was the Baniyas Refinery surely the Iranian vessel seized in Gibraltar waters was in transit to its destination. Similarly if you were to send medicine from a country that met all legal requirements in one country to another country with the same standards, would there be a legal basis to seize such medicine should it transit through a  third country that had different standards.

Iran are no more bound by EU sanctions than they are by US sanctions. This was an extraterritorial application of EU sanctions to a transaction thought to be planned for execution    outside of EU jurisdiction, between  two foreign parties. Furthermore  US sanctions rely completely on the dissuasive effect of probable  US punitive financial actions, they have no basis in international law.

The UK has offered to release the vessel if Iran was prepared to provide an undertaking that the cargo would not be shipped to Syria. There was no way Iran could agree to that as it would create a precedent which would mean Iran could not send a vessel through the strait of Gibraltar without it being subject to EU (UK) scrutiny and more importantly capitulate to be bound by EU sanctions.

This is further compounded because the UK proxy Gibraltar acted pre-emptively under the guise that they had reasonable evidence. Yet it has neither been established that the cargo was consigned to the refinery or Syria for that matter.

That Gibraltar in the days leading to the seizure of MT Grace 1 had upgraded their regulations regarding Syria sanctions points to the inescapable conclusion that this episode was planned well in advance with the objective of mounting pressure on Iran with the UK government as a willing conspirator. What is more difficult to ascertain is what was in it for the UK

 

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When the end came it came quickly an end that is to Irans policy of strategic patience. In a meticulous well planned and flawlessly executed operation, a detachment of Her Majesty's Royal Marines boarded and seized the Iranian oil tanker MTGrace 1 in waters off Gibraltar. It really did'nt need to be daring, the element of surprise was sufficient. We were told a party of 30 Royal Marines under the control of Gibraltar Customs and Police Officers secured the vessel in the early hours of the 4th of July. It is alleged that the vessel was carrying a crude oil cargo bound for Banyas refinery in Syria. The Gibraltar authorities said it had acted as it had reasonable grounds to suspect that the MT Grace 1 intended to breach EU sanctions.

The Gibraltar explanation is unconvincing especially given that in the 8 years the sanctions have been in place not one vessel has been intercepted. It is more likely the Spanish narrative is what happened. The seizure appears to have been co-ordinated at the behest of the US with the UK's assistance and therein lies the problem. At a time when the UK is seemingly attempting to convince Iran as a member of the E3 of its sincwrity in respect of circumventing US sanctions via INSTEX and keeping the JCPOA alive, this action exposes the UK's insincerity. The timing could not have been worse, which raises the question as to why now?. The Iranians would be forgiven for feeling it is one thing to not provide protection against US Sanctions under the JCPOA but entirely another assisting them to enforce sanctions militarily against you.

That such an action is unprecedent in the 8 years the sanctions have been in place, makes it unconcievable that deep consideration has not been given to it and to the likely effect such an act would have on the overall JCPOA. Is this a decision Theresa May would have made or either of the current or previous Foreign Ministers. One thing is for sure such a decision must have been agreed at the highest level of UK Government, whatever the wording of the communique delivered by the Gibraltar Minister. Is this decision an indication of the UK's post Brexit place in the world.

The Iranians would be justified in concluding the UK has made up its mind and given up all pretence of neutrality and sided with the US. Despite our ptotestations to the contrary, Theresa May must know by now her old trick of trying to ride two horses ends in ultimate folley. It is difficult to see how this will not escalate. If we are to believe comments emerging from Iran attributed to senior former commanders of the IRGC, it is a matter of time before Iran retaliate by seizing a British vessel. How much more preverse can it get when the UK begin to enforce sanctions for the EU at a time we cannot wait to leave the group and as a consequence create ramifications for ourselves long after we have left.

The Gibratar authorities insist they organised the vessel siezure " as a direct result only of it having reasonable grounds to believe that the vessel was acting in breach of
established EU sanctions against Syria”. From a strictly legal point of view they would have to have had sight of the vessel charterparty to identify the refinery as the consignee. For the cargo to be illegal under EU law the consignee would have to be a named sanctioned entity. there can be little doubt that this most recent action has been conceived to send a message to both Iran and its Syrian ally. Do Iran now put armed guards on their vessels as a precaution. They clearly need to stay out of Gibraltar waters. We are witnessing a very dangerous game. A game where it seems that US law now supercededes international law. Where this rules base world order is the gospel according to America.

As an interesting but no less significant aside. The Spanish are clearly incensed too. They believe the instructions came from the US and the UK carried out the seizure in what they contest are Spanish waters, This ignites a difficult situation as Spain have complained over the incursion said JosepBorrell Fontell the new EU Foreign Minister. British diplomats have however affirmed “It was done in observance of international law, and we have no doubt whatsoever that the government of Spain also supports the sanctions regime, even though we admit that both governments still have a pending dispute over the territory of Gibraltar. It seems that Spain felt the US should have informed them. when the UK informed Spain of the impending action, they erroneously imformed them that the action would take place in the Port of Gibraltar which is undisputed UK territory.

It is rare I find myself agreeing with Tucker Carlson the Fox News Commentator, but on this occasion he seems to have got it spot on. What is the agenda of the Neo Con
lobby in Washington. There are elements in the Trump Administration that will welcome an escalation, I am not certain Donald Trump is one of them. There seems to be an increasingly rogue foreign policy establishment in Washington led by Bolton, Pompeo and until recently Nikki Hayley, who are set on creating their own 'Gulf of Tonkin' moment. The Trump approach of "destructive disorder" has created a incoherent policy approach which basically allows any US Department free reign in dealing with the Iran situation, with no recourse to each other.

Given the history between the UK and Iran and its oil, it is hard to find a country outside the US more reviled than the UK by Iranians. The history which dates back to 1913 is a litany of unconscionable liberties culminating with the Mohammad MosaddeghI coup d'etat very obligingly declassified by the CIA a couple of years ago; which many commentators believe was instrumental in getting us to where we are now. To many Iranians this action is a stark reminder of those times. I suppose we should share a thought for poor old Nazanin Zaghari-Ratcliffe, whatever remote possibility she might have had of being released as well and truly gone

In the end the only surprise was that it was Putin that announced its confirmation at the G-20 meeting in Osaka  last week. When questioned about the decision to extend OPEC+ cuts, he seemed to confirm the extension even before the meeting had even taken place, confirmation if any was needed that it is Putin and the Saudis that are now calling the shots. OPEC said it's decision was based in part on the fact that "economic bearishness is now increasingly prevalent" because of trade tensions, central bank policies and "geopolitical issues." Additionally, OPEC agreed in principle to formalise a charter for cooperation with non-member producers’ led by Russia despite objections from Iran, which insisted the 'charter' must be ratified by national governments. Not however according to OPEC Secretary General Mohammed Barkindo who is of the opinion that such a Charter will last for 'eternity'.

 OPEC may well have added the following to their statement ,that budgets and economic pressures in member countries mean that they need to maximise the barrel price not least in Saudi Arabia where it is thought a price of $84/b is required to balance their budget or in Nigeria, where the budget is premised on $65/b oil but they too need $85+ to meet the burden of debt repayments. OPEC does not need to have a particularly long memory to remember the disasterous price war with US shale in 2014  which saw the barrel price drop from over $100 to $30/b whilst wreaking havoc on the economies of OPEC member states. Nobody wants to countenance a repeat performance of that catastrophe.

 Cutting production in the face of weakening demand would make perfect sense if it did not provide increased market share for non OPEC+ producers. OPECs dwindling production now under 30 million barrels a day, has made way for Shale production growth. Cutting production seems to have created a market that shale can survive,    though I have my misgivings about shale's long term sustainability, especially against the backdrop of the Fed's anticipated policy of quantitative tightening.

 Meanwhile though the Iranians were not consulted and do not like  the fact that the decision making for the alliance now seems to be firmly a Riyadh-Moscow

prerogative, were on this occasion prepared to agree to extending the production cuts . Zanganeh the Iranian Oil Minister did  object to  Saudi Arabia and Russia

taking unilateral decisions for the group.

"I think the main issue OPEC has today is unilateralism,"  he went further to say  "OPEC needs to discuss with one another before decisions can be made. For one or two members to discuss outside OPEC and only bring the decision to OPEC for a final stamp of approval, this is the biggest threat to Opec at the moment".  Though he later soften his stance. He also confirmed that Iran had no intention of withdrawing from OPEC.  However he went on to voice Iranian concerns regarding quotas, "Even if

they extend for another three years, I have no problem," Zanganeh said. But cautioned that once US sanctions were removed, Iran would  not accept any constraints on its production.

The market had pretty much priced in an extension and so it was purely a matter of how long such an extension might be. Oil prices rallied on Monday in anticipationof the OPEC news and in response to the truce in the trade war between the United States and China. US oil prices finished the day 1.1% higher, giving back some

earlier gains. However Brent crude  futures fell today by $2.66, or 4.1%, to settle at $62.40 a barrel on with . U.S. West Texas Intermediate (WTI) crude  futures falling $2.84, or 4.8%, to settle at $56.25 a barrel, after touching their highest in more than five weeks on Monday.  Global oil demand growth for this year has fallen to 1.14 mbpd (million barrels per day) while non-OPEC supply is forecast to grow by 2.14 mbpd,” PVM analyst Tamas Varga wrote in a note. The major concerns around contracting economic growth and demand destruction have created a bear market that may require additional co-ordinated action from OPEC+

 

Putin yet again seems to have played a blinder. Though it must be acknowledged that he has been ably assisted in creating this new construct by an intransigent US

President that has put enormous pressure on Saudi Arabia to pump more oil at any cost.  US sanctions on Iran were responsible in part for sharp price increase in oil

prices in the first four months of this year. Oil prices have increased by over 20% since the beginning of the year. The loss of Iranian crude represents about 2.2 million bpd.

The Trump Administration has tasked both the Saudis and the U.A.E with pumping enough crude  to compensate for this loss and to meet Asia’s needs, but in particular Japan, South Korea, India and China.  The Saudis do have the spare capacity but have steadfastly continued to pump below their quota.  Saudi Oil Minister Khalid Al-Falih used a press conference on Monday night to say the kingdom was willing to keep cutting more deeply than its quota requires. Their objective is to drain the market of what it deems excess inventory and restore demand supply equilibrium.

 The Saudis clearly believe OPEC+ provides them a much better chance to counter US shale and withstand the unprecedented pressure the Trump Administration are subjecting them. OPEC and Russia are  unlikely bedfellows in what is a marraige of convenience.  Despite Zanganeh the Iranian Oil Ministers initial disquiet about how the decision to continue the production cut was reached,   by Monday evening  he had thrown his support behind the deal:

 “The meeting was good for Iran and we achieved what we wanted.”.

When asked if Putin was  now calling the shots the Saudi Energy Minister Khalid al-Falih responded “I don’t think Russia is calling the shots,”  when asked if Putin was now OPEC’s boss. he went on to say “I think Russia’s influence is welcome.” In a very rare show of unity Iran’s  OPEC governor Hossein Kazempour Ardebili concurred, echoing his boss Zanganeh’s conciliatory tone. Given the chorus of approval coming from OPEC member states it would appear for all intents the distrust and antipathy that had once characterised the relationship between the two parties is well and truly dissipated.

None of this will please President Donald Trump, who has repeatedly called for OPEC to pump more oil to keep US gas  cheap. Importantly there are potential political ramifications for  the 'special relationship' that currently exist between the US and Saudi Arabia. At a time when the US Congress have blocked arms sales to the Saudis. Russia seem to be fostering a much better, closer and  influential relationship with Riyadh. The collaboration could lend Saudi Arabia a non judgemental alternative to the US ,  it will crucially also bolsters Putin's clout in the Middle East. The Iranians seem to be singing a slightly different song and it is highly likely they too will reach out to the Russians

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