Maduro’s Tour Comes Amid Proof That Saudi Strategy Is Beginning To Sting

The glaring divide between OPEC’s “haves”—those member countries who are pumping at near full production capacity and have a buffer of substantial financial reserves to withstand a sustained price decline—and OPEC’s “have nots”—those within the group with declining capacity from lack of investment and little if no financial buffer to weather the current price collapse— has become more readily apparent in the past several weeks. No greater sign of this divide was Venezuelan President Nicolas Maduro’s feverish tour of several OPEC nations as well as China and Russia to seek support in shoring up oil prices and to secure financial aid for his struggling economy.

While Maduro reported  he was successful in gaining $20 billion in new Chinese investment for a number of projects in the Latin American country and that the Qatari government had pledged to lend him “various billions”, his pleas to Riyadh and Doha to moderate OPEC’s current strategy and agree to cut the group’s production to begin an oil price recovery most certainly fell on deaf ears.

And why not, giving that the strategy pushed by Riyadh and supported by the other member countries of the Gulf Cooperation Council (GCC) in OPEC apparently is beginning to see results, particularly in terms of hitting non-OPEC producers where it hurts and reclaiming market share. Reports show that in the past six weeks, the U.S. oil rig count has fallen by 209, marking the sharpest six-week drop since tracking began in 1987, with the oil rig count falling by 55 in the week ending January 16th and the count for horizontal rigs that are used in shale production dropping 48 in the same week, reflecting its biggest single-week decline.

OPEC also got encouraging news from the latest monthly oil market report from the International Energy Agency (IEA)—at least in the short term. In its report released on January 16th, the IEA pointed to declining oil prices cutting into non-OPEC production growth in 2015, with the organization reducing its estimates for non-OPEC supply growth by 350,000 b/d. The IEA now forecasts non-OPEC supply growth at 950,000 b/d for this year.

However, in its report, the IEA did suggest that “A price recovery—barring any major disruption—may not be imminent, but signs are mounting that the tide will turn.” And, interestingly enough, the IEA indicated that U.S. oil output for 2015 will remain pretty strong, with supply growth falling by a mere 80,000 b/d. The market watchdog sees larger losses in production growth during the year from Colombia (175,000 b/d) and Canada (95,000 b/d).

The IEA now puts its call for OPEC crude at 29.2 million b/d for 2015, a tad higher than OPEC’s own adjusted call of 28.8 million b/d announced a day earlier, which was reduced by about 100,000 b/d from OPEC’s December monthly report. And, OPEC itself boosted its previous estimate for U.S. oil production for 2015 by 90,000 b/d to 13.81 million b/d in its latest report, but it also lowered its forecast for U.S. supply growth for the year from 1.05 million b/d to 950,000 b/d, which is now in line with the IEA’s new forecast.

There are no indications that OPEC’s GCC contingent is wavering on its stance on maintaining the group’s high production levels, currently over 30 million b/d for the seventh consecutive month. In the midst of Maduro’s touring of OPEC nations and China and Russia, U.A.E. Oil Minister Suhail Mohamed al-Mazrouei, speaking at an energy event in Abu Dhabi, argued that OPEC “cannot continue protecting a certain price … We are concerned about the balance of the market but we cannot be the only party that is responsible to balance the market.”

Venezuela has been a strong opponent of Riyadh’s plan to stem non-OPEC production through a painful price war and market share battle, given that the Latin American producer’s economy is in shambles. Maduro is facing increasing heat at home, where inflation has risen to 64 percent, the country appears close to defaulting on its foreign bonds, food shortages are on the rise and the latest polls suggest he only has support from 22% of the population. The Venezuelan leader, admitting last month that his country is in recession, has insisted that the financial crisis  is the result of an “economic war” waged by political foes.

Maduro received the full royal treatment during his visit to Saudi Arabia on January 11th, meeting with Saudi Crown Prince Salman Bin Abdul-Aziz, Deputy Crown Prince Muqrin Bin Abdul-Aziz, Intelligence Chief Prince Khaled Bin Bandar and several sons of the ailing King Abdullah Bin Abdul-Aziz, who has been hospitalized since December 31st, as well as Saudi Oil Minister Ali Naimi. While the official Saudi Press Agency gave no details about Maduro’s visit with the Saudi leadership, the Venezuelan government released a statement saying that, “We agreed to work to recover the market and oil prices with state policies between the two energy powerhouses.”

In Doha on January 12th, Maduro spoke to Venezuelan state television, declaring that, “We’re finalizing a financial alliance with important banks from Qatar that will give us sufficient oxygen to help cover the fall in oil prices and give us the resources we need for the national foreign currency budget.” He indicated that the financing would involve billions of dollars covering 2015 and 2016.

Maduro met more kindred spirits for supporting a return to higher oil prices through production cuts while visiting Iran. In Tehran on January 10th, Maduro first met with Iranian President Hassan Rouhani and later with Iranian Supreme Leader Ayatollah Ali Khamanei. Both Iranian leaders took the opportunity of Maduro’s stop in Tehran to again accuse Saudi Arabia (and ostensibly the United States) through veiled references of instigating the price rout for political reasons. Rouhani called on OPEC members to “neutralize schemes by some powers against OPEC and help stabilize an acceptable oil price in 2015.” The Ayatollah, on his part, insisted that, “Our common enemies are using oil as a political weapon and they definitely have a role in the sharp fall in oil price.”

The fact that Maduro turned to Beijing and Moscow for financial help is no great surprise, although Russia—also hard hit by oil prices that have collapsed 60% since last summer—may not be in the strongest lending position currently to help bail out Caracas and it is questionable how much aid Maduro was pledged when he met with Russian President Vladimir Putin on January 15th. Following that meeting, the Venezuelan leader declared that, “I have got the funds needed so that the country can maintain its rhythm of investment, of imports and economic stability.” 

While Maduro announced during his visit to Beijing earlier this month that he had signed bilateral deals with the Chinese government for $20 billion in new Chinese investments in projects in the Venezuelan energy, industrial and housing sectors, he gave few details and it is unclear if these deals will entail a loan-for-oil arrangement that has come to typify Chinese-Venezuelan agreements.

The Chinese government had cultivated a strong relationship with Maduro’s predecessor, Hugo Chavez, beginning in 1999, and it was Beijing that Chavez increasingly turned to when his Bolivian Revolution started hitting tough financial times and the Venezuelan president had to boost borrowing to cover government spending and debts. Since 2007, China has offered Caracas as much as $50 billion in credit in exchange for dedicated oil supplies.

Indeed, in April 2010, the Chinese government stated that it had signed seven cooperation deals with Venezuela, including a framework agreement for financing that entailed the China Development Bank offering Venezuela a $10 billion loan and an additional credit worth approximately $10.4 billion. As required by the Venezuelan law that was passed to endorse the financing, Caracas was to repay China with no less than 200,000 b/d of crude in 2010, no less than 250,000 b/d in 2011, and no less than 300,000 b/d in 2012. The question today is how much of Venezuela’s crude output is already committed to repaying existing Chinese loans and how much more will be heading to Asia’s largest market from the latest deals?

Saudi King’s Health Crisis Puts Succession, Oil Strategy Under Microscope

Oil markets have all but shrugged off news of Saudi King Abdullah bin Abdul-Aziz’s week-long hospitalization for complications from pneumonia and the question it again raises of Saudi royal succession. But Saudi oil policy was still fresh on everyone’s agenda amid renewed signs that Saudi Arabia is committed to holding firm to current levels of its own production as it engages in a battle for market share.

Prices early this week fell below $50 a barrel—roughly halved since the summer of 2014—in part on the Kingdom’s decision to further trim its official selling price for Arab Light for February delivery to the United States by 60 cents a barrel, a deliberate move to secure market share in its once top priority market against rising pipeline shipments to the U.S. Gulf coast from Canada. The markets also took note of a televised speech to the Saudi Shura Council on January 6th delivered by Crown Prince Salman bin Abdul-Aziz in King Abdullah’s name in which the Crown Prince emphasized that the Kingdom will deal with the steep drop in oil prices with a “solid will” while attributing the price collapse to “slow growth in the global economy” without referring to oversupply issues.

In addition to the pressing health issues of the Saudi monarch, news of a suicide and gun attack on a Saudi border patrol on January 5th by four armed men from Iraq that resulted in seven dead raises more security concerns for the Kingdom as it faces increasing threats from the Islamic State and al-Qaeda as well as ongoing disturbances from within its own Shi’ite community. It was just two months ago that militants linked to Islamic State carried out an attack at a Shi’ite mosque in the al-Ahsa region of the Eastern Province, killing seven people. It is still unclear who carried out Monday’s border attack, with some reports suggesting that Islamic State is taking credit for the move while the Saudi Interior Ministry says it cannot tell who committed the attack until it has identified the remains and that could take some time.

It was 19 years ago in December that then Crown Prince Abdullah became regent of Saudi Arabia, effectively taking over the day-to-day running of the Kingdom following the stroke of his half-brother King Fahd bin Abdul-Aziz, and it will be ten years ago this coming August when Crown Prince Abdullah assumed the throne upon King Fahd’s death.

News of the 91-year-old King Abdullah’s  hospitalization on December 31st caused Saudi stocks to slightly dip while the oil markets seemed almost indifferent to the news. The royal court revealed on January 2nd that the Saudi monarch was suffering from pneumonia, requiring temporary aid from a breathing tube, having been moved from the King Abdulaziz Medical City Hospital in Riyadh to a military hospital. Since then, there have been almost regular updates from the royal court about the King’s health in what appears calculated to reassure both the domestic population as well the international community.

It is clear that King Abdullah is in frail health, but there is also very little doubt that the succession will play out as planned, with 79-year-old Crown Prince Salman slated to assume the throne upon the King’s death. The Crown Prince has been ably filling in for the ailing monarch, despite his own health concerns, notably attending the early December heads of state GCC gathering in Doha, chairing cabinet meetings and as mentioned above, giving a televised speech in King Abdullah’s name to the Shura Council on January 6th.

In March of last year, King Abdullah named his half-brother Prince Muqrin bin Abdul-Aziz as second deputy prime minister and second crown prince. In an indication of just how difficult it is to establish the order of succession in the Saudi royal family, the position of second deputy prime minister—long the signal of the next in line behind the crown prince—had remained empty since October 2011, when Prince Nayef bin Abdul-Aziz was named Crown Prince, a period of more than two years.

At 69, Prince Muqrin is the youngest surviving son of founder Ibn Saud, and is said to be a close advisor to King Abdullah. A former officer in the Saudi air force, he was educated in the United States and United Kingdom. His appointments as second deputy prime minister and second crown prince came within hours of a visit to the Kingdom by President Barak Obama, making some surmise that the move was calibrated to reassure Washington about the Saudi line of succession before Obama’s trip.

While the appointments of Prince Muqrin to those two posts might not have gone down well with some within the royal family, it would suggest that the conservative old guard had won out and that the status quo of the sons of Ibn Saud sitting on the Saudi throne had been maintained, putting off the question of when a grandson of Ibn Saud will one day come to power. It appears that Crown Prince Salman was on board with Prince Muqrin’s promotions and the two are believed to enjoy a good working relationship.

Named head of the National Guard in 1962 and named Crown Prince in 1982, Abdullah came politically from outside the powerful “Sudairi seven” circle inside of the Saudi leadership (the seven sons of ibn Saud from Hussa Bint Ahmad Al-Sudairi, which included King Fahd and Princes Nayef and Sultan–who both served as Crown Prince and died within eight months of each other–and current Crown Prince Salman). With Crown Prince Salman eventually becoming King, a Sudairi son would again be on the throne and this could signal a shift back to policies more aligned to the United States, as was seen under the reign of the last Sudairi circle monarch, King Fahd. King Fahd was serving as King during previous periods when Saudi Arabia implemented oil market share oriented policies in 1985 and 1998.

When the current King was named Crown Prince in 1982, some Western commentators and Royal watchers raised concerns about Abdullah’s perceived reputation as a xenophobe who had a particular dislike of Americans and was open to more balanced ties with Russia. However, this proved to be an inaccurate assessment; rather the King proved to be willing to embrace a more regional focus and to remedy what he perceived as an unbalanced relationship between Riyadh and Washington. Indeed, since assuming more authority in the Saudi leadership in 1995 and then becoming King in his own right, King Abdullah demonstrated his willingness to undertake independent foreign policy stances and not always remain in lockstep with the United States on foreign policy and oil policy.

Beginning in 2003, it was with King Abdullah’s guidance that Saudi Aramco began shifting its market focus to Asia away from the United States, deciding it was more beneficial economically to concede its position as top oil supplier to the United States and instead be in the “top few” suppliers. At the same time, Riyadh also sent the political message that the Saudis were not going to acquiesce when Washington wanted support on foreign policy initiatives which deviated from the Kingdom’s national interests.

Relations between the United States and Saudi Arabia in recent years have seen the two allies take widely different stances on Iraq, Syria and Egypt. But the two countries have come together when it has been politically expedient for both of them, such as the Kingdom playing an active role in the airstrikes led by the United States on the Islamic State in northern Syria.

Over the past two decades, first as Crown Prince and then as King, Abdullah has been fully engaged in oil policy changes and has strongly backed Saudi Oil Minister Ali Naimi, who has served in his position since August 1995, and is now one of the senior members of the Saudi cabinet. As I referred to in my December 28th blog post on the 2015 Saudi budget, the Saudis were willing to sacrifice much financially in the late 1990s to engage in a price war to protect market share.

It is important to note that during the height of the current price war being marshalled by the Kingdom, on December 8th the Saudi monarch maintained Minister Naimi in his post at the oil ministry while making dramatic shifts in his cabinet that saw changes to eight ministries, sending a clear message that King Abdullah supports the current Saudi oil policy and its ramifications at home and in the markets. Crown Prince Salman’s recent reading publicly a message on oil from the King would seem to imply that he too supports the current policy.

As succession issues have loomed large on the minds of those tracking the Kingdom in the past week, it’s hard not to give thought to the next generation of princes—the grandsons of Ibn Saud—who are being positioned in the line of succession. Within recent years, King Abdullah has made several strategic choices in appointing younger generation princes to ministerial positions. Notably, in November 2012, the Saudi monarch named Prince Mohammed Bin Nayef, the son of the late Crown Prince Nayef, as his Interior Minister, and in May 2013, King Abdullah created a cabinet position for the National Guard and appointed his own son, Prince Miteb Bin Abdullah, as its minister.

It bears mention that both of these younger generation princes have made official trips to Washington in the past several months, with Prince Miteb meeting with President Obama and Defense Secretary Chuck Hagel and visiting the U.S. National Guard Command in mid-November, and Prince Mohammed making a week-long visit in mid-December, meeting with President Obama, Vice President Joe Biden, Secretary of State John Kerry, and other senior officials in the Obama Administration.