Friday, 23 June 2017

Oil Bulls Miss Out on a Royalty Check

In Oil & Companies News 23/06/2017

In the West, millennials must often contend with an unfortunate stereotype of being shallow narcissists, their indolent existence punctuated by selfies and the occasional hook-up.
Things are different in Saudi Arabia.
There, newly elevated crown prince Mohammed bin Salman — born 12 years after the 1973 oil shock — appears more of the move-fast-and-break-things variety.
Mindful that more than two-thirds of his fellow Saudi Arabians are either millennials or post-millennials, “MBS” is spearheading an ambitious plan to wean the economy from oil in order to create enough productive jobs to occupy them. He has also led a more assertive foreign policy in war zones such as Yemen and Syria and spearheaded the recent blockade against fellow Gulf monarchy, Qatar.
So the potential for things to break in this oil powerhouse and its oily environs, perhaps catastrophically, is not small these days.
Yet the reaction of the oil market is, like, whatever:

A decade ago, even a rumor of change at the top of the OPEC kingpin would have been enough to jolt prices higher. But then, a decade ago, China’s appetite for oil was deemed to be approximately infinite, and shale was, for most people, something picked up at the beach.
If it wasn’t clear before, oil’s insouciance in the face of a reshuffling in the House of Saud — not to mention sabers being rattled by the U.S. and Russia in Syria — is all the proof you need that the hot money has gone elsewhere. The same apathy can be seen in shares of every type of energy firm, from exploration and production companies to pipeline operators. The glut of oil inventories, still high despite OPEC’s supply cuts, smothers any excitement about geopolitics.
Is the market being too chill?
It is easy to lay out a bullish scenario for oil prices based on what’s happening in the Middle East. The struggle between Riyadh and Tehran for dominance in the region is the common thread running through the conflicts in and around Yemen, Syria and Qatar.
The latter one, in particular, comes in the context of an apparent shift in policy by another crucial actor: the U.S. President Donald Trump has claimed he backed Qatar’s isolation, a marked break with his predecessor’s approach of trying to balance the region’s rivalries — albeit, not an entirely clean break, given that the tweets emanating from the White House contradicted a more conciliatory line from the State Department and Qatar hosts a major U.S. military base.
The chief architect of Saudi Arabia’s more assertive foreign policy has, therefore, consolidated power soon after receiving the apparent blessing of Washington to double down on his strategy. Tensions between Saudi Arabia and Iran, already high, may well escalate further.
And while President Trump hasn’t yet followed through on his fiery campaign rhetoric regarding the nuclear accord struck with Iran under President Barack Obama, he clearly isn’t a fan. The Senate’s recent passage of a bill to impose new sanctions on Iran for its ballistic missile program suggests there is potential for that deal to unravel as Iran and the U.S. test each other’s limits.
Yet it’s also possible to envision a less Tom Clancy-esque course of events.
For example, while MBS’s consolidation of power might provide a springboard for more aggressive moves in foreign policy, Christyan Malek, an energy analyst at JPMorgan, posits it may have the opposite effect. In a more secure position, and mindful of the need to press ahead with his reform program, MBS may try to avoid ratcheting up tension further, especially as higher military spending only exacerbates the yawning fiscal deficits he has to close.
He may also be reluctant to do more to support oil prices — by, for example, cutting Saudi Arabian output further — given the benefits Iran would reap from that.
As for the nuclear deal, while pressure on it has increased since November, it remains intact and there are good reasons for both Iran and the U.S. to avoid a complete break.
Make no mistake, geopolitical risk is rising: How could it not be with a swath of petro-states such as Venezuela facing potential implosion and America seemingly less committed to the world order it has led for decades?
Equally, though, high oil inventories blunt immediate concern about potential supply shocks, as does the expectation that any resulting price spike could spark a frack-fest in U.S. shale supply.

And then there is MBS himself. While his foreign adventures do raise bullish risks, remember that his domestic reform agenda aims at one, deflationary thing: getting Saudi Arabia to a point where it can live with sub-$50 oil. The more progress the millennial-in-chief makes on that, without burning down the house, the harder it will be to inject some drama into prices.

Source: Bloomberg