Here's What's Really Underway in the Persian Gulf
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Here’s What’s Really Underway in the Persian Gulf

by | published July 5th, 2019

I’m not going to mention the airline by name, but our trip back from Heathrow to Miami was rather unpleasant. That means this Oil & Energy Investor will be more succinct than normal, given that sleep still awaits me.

So, let’s begin with how my trip finished.

My presence ended up being a courtesy call – probably the most accurate way to describe my second reason for traveling to Europe.

I never believe such sit-downs will result in any genuine breakthroughs by themselves. The advances essential for success in the energy investment world come from meetings held over time among individuals who come to understand each other.

So, this time around, I brought low expectations into discussions with Iranians and regional banking interests interested in salvaging Iranian oil export revenues.

That just about sums up what transpired…

A Cordial – But Brief – Meeting

Following three days of intensive meetings in London over the prospects for oil investment in Iraq, my follow-on concerning the Iranian side of things was quite different. After having spent several years developing the contacts, there was a need to continue with these meetings. I had hoped it would be a substantive conversation about what investment and export venues were emerging.

But geopolitics intervened and the session ended up being cordial but brief.

I had anticipated there may have been some clarity on Iranian intentions, even if discerning what that was required reading between the actual points being made from the other side of the table. But that was never a genuine option, given the events that have unfolded during the past month

The Persian Gulf is now in that unsettling early never-never land having the ominous feel of war.

It is the extent of what military exchange transpires that is now the issue.

While in London, I ended up doing an interview with the China Global Television Network with anchors from Beijing and Washington before leaving the city (Watch the interview right here). We talked about the OPEC+ (OPEC plus outside major producers led by Russia) decision to extend production cuts for nine months.

This was never really an issue; there would broad-based indications that the move would take place.

For example, a few weeks ago OPEC cancelled a meeting, moving everything forward to discussion to last week’s regular meeting at its Secretariat in Vienna. Some pundits saw this as a sign that there were problems inside the organization.

However, my sources at the time dismissed the concerns outright.

As one succinctly put it, “There was no reason for a meeting. Everything, including the production cut extensions, already have wide approval by OPEC. The only question is what Russia will say.”

And since Moscow is not part of OPEC, the cartel had no reason to discuss matters to which they had already agreed. Any question of Russian support was eliminated when Russian President Vladimir Putin spoke in favor of a continuation at the G20 meetings in Osaka, Japan.

Why OPEC Doesn’t Take the U.S. Seriously Anymore

The OPEC consensus was evident in Vienna.

Even Saudi Energy Minister Khalid al-Falih and his Iranian equivalent Bijan Zanganeh spoke in favor of continuing the cuts – and these two rarely agree on anything.

Their two countries are locked in a bitter Yemeni civil war. Teheran considers Riyadh its bitter enemy and regards the Saudis as the tool of the U.S. in the widening regional battle.

On the other hand, Zanganeh wanted the cuts deeper than the 1.2 million barrels a day in the extension. He also declared (again) that OPEC as an effective body was just about dead. So, there is that.

Continuing the cuts was, of course, in direct opposition to pressure brought by U.S. President Donald Trump. Trump wants to keep the cost of crude oil as low as possible to subdue what has been a rise in oil product prices.

Yet his impact has been noticeably reduced with OPEC.

In the period just before U.S. sanctions against Iran were to resume last fall, other producers increased volume in anticipation of a dramatic decline in Iranian oil exports.

However, at the last minute, the White House provided 180-day exemptions to the right largest imports of Iranian crude. That delayed major cuts in Iran’s exports and produced a significant global supply glut.

The glut kept gasoline prices in the U.S. from rising just before an off-year election but left OPEC bristling at being used as an American domestic political football. This time around, OPEC decided to attend to its own interests.

With the U.S. moving more firepower into the Persian Gulf, the price of oil moving forward is likely to be right in the center of a serious geopolitical tug-of-war.

And that becomes a curious and disconcerting segue between last November and to what it is taking place now in the region.

As one of my Iranian contacts put it during our meeting, “This time around, the cost of gasoline will be the least of American worries.”

In two months, I am scheduled for my next separate meetings with both sides.

They are to take place in the Persian Gulf – Dubai in the United Arab Emirates (UAE) and Doha, the capital of Qatar. The UAE is a strong ally of Saudi Arabia and the U.S. Qatar has been moving closer to Iran, although the country still hosts the largest forward military theater headquarters of the U.S. Central Command at the Al Udeid Air Base.

So, stay tuned, because I plan to bring you along for these meetings as well.

Let’s hope there is still a Persian Gulf around to be worth the trip.

Sincerely,

Kent

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