Purim War- Part 3, The End Game*

The end game in the Iran War has begun. By attacking Israel’s Dimona nuclear facility and the Temple Mount, the home of Islam’s Dome of the Rock holy site, Iran has demonstrated it has become desperate. To add an exclamation point to it, Iran fired off an intermediate range ballistics missile (IRBM) at the Diego Garcia airbase 4,000 kilometers away to prove it had a missile capable of reaching western Europe. Instead of scaring off Europe, it will bring NATO around to giving full support to our efforts to reopen the Persian Gulf to navigation.

 

The existence of the Iranian intermediate range missile represents a proof text of the existence of the imminence of the Iranian threat.  Simply put, Iran’s strategy is now to take down everything around it as the price of its regime collapsing. Make no mistake, Iran is being run by a death cult thereby making it less likely that the Mullahs would seek an offramp.

 

In response President Trump has threatened to destroy Iran’s electricity infrastructure if it fails to reopen the Strait of Hormuz by early tomorrow evening. The first round would likely be done with an electro-magnetic pulse weapon used in Venezuela that would not permanently destroy the facility. That along with the Saudi move to kick out the Iranian embassy indicates that by early next week the entire gulf will be ablaze with tit -for- tat Saudi/Iran attacks on each other. In this environment the Persian Gulf will be closed to all.

 

Needless to say, the oil and stock markets will reflect this turn of events with oil prices moving sharply higher and stocks sharply lower.  

 

·       See: Shulmaven: The Purim War and Shulmaven: The Purim War: Part 2 )

The Purim War: Part 2

 We are now nine days into the Purim War (See: https://shulmaven.blogspot.com/2026/02/the-purim-war.html ) where the U.S. and Israeli air forces are pounding the Islamic Republic of Iran. With Iran attacking Saudi Arabia and the Gulf States the war has widened to encompass the entire Persian Gulf with shipping all but shut down in the Straits of Hormuz. At this writing the price of WTI Oil has skyrocketed to $106/barrel. The attacks on the Sunni Arab states are all part of Iran's plan to create chaos in the Gulf to force the U.S. to backdown. In addition as we noted Israel has taken the opportunity to respond to Hezbollah attacks to pound them in Lebanon with the Lebanese government intervening on the side of Israel for the first time.

All of this was expected, but if we step back the Israelis and the Americans have made great progress. Iran's air defenses have been neutralized, weapons warehouses have been bombed, police stations have been taken out and earlier today a major oil depot in Tehran was set ablaze. Tehran was suffering from a severe water shortage before the war, the hit to the depot will only exacerbate an already bad situation.

Make not mistake, from both the Israeli and the American points of view the war is progressing well. Within in two weeks much of Iran's offensive capabilities will be eliminated and with that the Straits of Hormuz will have been cleared.

Today Iran selected Motjaba Khamenei, the son of Ali Khamenei, as its supreme leader thereby undoing a promise of the 1979 revolution to not allow hereditary changes in the leadership. The delay in his appointment signaled major divisions within Iran's ruling circles. By the way Motjaba just happens to own a mansion in London.  My guess is that Motjaba will soon have the same fate as his late father. Once that happens the way will be open for disgruntled members of the Islamic Revolutionary Guard Corps to seize power and open the way for a political settlement. They will be pushed into it when they lose control of the streets of Tehran to the populace and the oil workers at the giant Abadan refinery strike.

The Purim War

 About 2,382 years ago Esther and Mordechai ousted the Jew-hater Haman, first minister of Persia; an event that is now celebrated as Purim by Jews all over the world. In an eerie coincidence Purim starts on Monday evening March 2^nd. This time, instead of Haman being killed, the bulk of the Iranian leadership including the Grand Ayatollah Khamenei was killed in precision airstrikes by the Israeli air force. The U.S./Israeli effort’s goal is to topple the Iranian regime that has long threatened the region and was yet again reconstituting its nuclear and missile programs. With Iranian negotiators practicing “rope-a-dope” tactics with U.S. negotiators, President Trump’s patience ran out, and he unleashed an air and naval armada on the Iranian regime.

 

My sense is that Trump’s logic was the Iranian regime was weakened by the mass protests against it in January triggered by its collapsing economy. The regime responded with brute force and killed anywhere between 30,000-50,000 people. As they say in China, the Iranian mullahs “lost their mandate from heaven.” It will now be up to the Iranian people to establish a new course.

 

What happens next depends on the staying power of the remnants of the regime and the willingness of the U.S. and Israel to sustain a long campaign. Meantime, by attacking U.S. bases in Saudi Arabia, Iran lost the neutrality of the Arab gulf further isolating them. The other thing to think about is whether or not Israel will take advantage of the situation to cleanup its unfinished business with Hezbollah and Hamas.

 

Of course, it goes without saying, the Democrats are up in arms against Trump making war without congressional authorization. However, a careful reading of the war powers act means that what Trump did, as commander in chief, was legal so far. However, he does have to report to Congress on the war, and Congress will have a say. My sense is that Iran 2026 is not Iraq of 2003 but then again time will tell. But make no mistake, the middle east will not be what it was as of last Friday.

Trump's Gaza Plan: More than Meets the Eye

 At his joint news conference with Israel's Prime Minister Netanyahu, President Trump stunned the world by calling for the resettlement of Gaza's population to pave the way for a massive development project under U.S. auspices in Gaza. According to Trump it would be a new "Riviera." Aside from the Israel far right, the idea was uniformly panned in the middle east, Europe and among Trump's MAGA base. Simply put, it is not going to happen.

However, Trump's forced the region to wake up to the fact that we can't go back to the world as it stood pre-October 7th. It will force the Palestinians to come to terms with the new realities of the region.

What has not been said is that while the U.S. will not rebuild Gaza, Trump's idea has whetted the appetite of every property developer from Egypt to Turkey to Saudi Arabia to the Gulf. While Gazans won't accept the U.S. to take the lead, they might be more amenable to an Arab consortium in a project that, of necessity, would involve the temporary exile of portions of the current population. I have to believe that discussions are already underway across the capitals of the middle east.  

Hamas Aggression Must be Punished

Hamas' aggression against Israel has to be punished; quickly and severely. To use the words of the 1950's Cold War, Israel has to massively retaliate to avenge the deaths and kidnapping of its civilians. Put bluntly, Israel has to destroy Hamas root and branch. By acting this way the country will gain the respect of the region and instead of putting the proposed U.S./Saudi/Israel deal on hold, it would accelerate it. 

Remember, an Israel that looks weak will garner no respect in the broader Middle-East. Indeed to reinforce the idea that Israel means business Netanyahu ought to form a new unity government by bringing in the center-left and kicking out the rabid right ministers, who by the way have no military experience. Just to note, prior to the 6-Day War in 1967, Israel formed a unity government.

Now is not the time for recriminations, but once the objectives in Gaza are achieved a full blown inquiry will be needed to examine the gross military and intelligence failures of the government that enabled the aggression in the first instance.

My Conversation with Ori Nir on the Situation in Israel: Part 2

 On September 10th I had a wide ranging conversation with Ori Nir, Vice President for Public Affairs of Americans for Peace Now on the proposed judicial reforms in Israel, relationship with the Palestinians and the proposed Israel-U.S.-Saudi Arabia- Palestine mega deal. The YouTube link is below. This is a follow up of on our March 19th conversation. (Shulmaven: My Conversation with Ori Nir on the Situation in Israel)

An Update on What’s Happening in Israel: The View from Americans for Peace Now - YouTube

My Amazon Review of Walter Russell Mead's "The Arc of a Covenant: The United States, Israel and the Fate of the Jewish People"

 

America’s Changing Views on Israel

 

Bard College professor and Wall Street Journal foreign policy columnist Walter Russell Mead has written three books in one. The first is a history of the U.S- Israel relationship, the second a history of American foreign policy and the third is a recent history of domestic politics in the United States. In Mead’s view all three are inter-related. This book is above all on the how’s and why’s of the American view on Israel. I write this just as President Biden has left the middle east after visiting Israel and Saudi Arabia signaling a reconfiguration of the region’s chessboard.

 

At the outset Mead completely debunks the view that U.S.-Israel policy is controlled by the so called “Jewish Lobby.” To be sure there is a pro-Israel lobby, but it is far from controlling and it suffers from as many failures as successes. Further American presidents, Nixon, Reagan, W. Bush, and Trump who did much to cement the relationship between the United States and Israel were decidedly unpopular among the largely liberal Jewish community.

 

Mead starts his history in the late 19^th century where a group of Philo-semitic Protestants articulated the support for a return of the Jews to their ancient homeland. Steeped in the bible and the classics these Christians thought it was only natural for the Jews to have a state of their own especially after Greek independence earlier that century and the creation of new Rome in the form of Italy. These views predated Herzl’s Zionism.

 

Mead goes into great detail the policy arguments that took place in the Truman Administration concerning the formation of the State of Israel. His Secretaries of State and Defense were firmly against it, but Truman finally came down on the side of independence. Much was made at the time of the importance of the Jewish vote in the upcoming 1948 presidential election. However, Truman needed the support of the liberal internationalists under the leadership of Eleanor Roosevelt who viewed the success of the U.N resolution on Israel to be critical to that organization’s future. Truman needed to keep Roosevelt from supporting the far-left candidacy of Henry Wallace.

 

Of interest in 1948, Stalin, motivated by his need to make trouble for Britain and the United States in the middle east, gave the greenlight to Czechoslovakia to sell arms to Israel. Those arms made the crucial difference in Israel’s war for independence. It also supplied hard currency to the Czech’s who desperately needed it after turning down Marshall Plan aid.

 

As difficult as it seems today, the American Left was the home to most of Israel’s support in the 1950’s and 60’s. Israel, for all practical purposes, was a struggling socialist country supporting the dispossessed Jews of Europe and the Arab world. However, today the Left sees Israel as militaristic, capitalistic settler-colonialist state. It seems that the American Left just loves to penalize Israel’s success in building a modern state in an otherwise impoverished middle east. Those are the very attributes praised by the “Jacksonian evangelical Zionists” of the American Right.

 

Nevertheless, Mead leaves much out of his history. Not much is said about the 1956 Suez War where Eisenhower backs Egypt against Israel, France, and Britain; the 1982 Lebanon War which turned American public opinion against Israel, and the taking out of the Iraq nuclear program. Mead resumes his discussion U.S.-Israel relations in the 2000’s and highlights the failures of the magical thinking of George W. Bush’s neocons with the Iraq War and Obama’s with respect to the Arab Spring, Iran, and Israel. Ironically Obama’s missteps in region led the Abraham Accords and burgeoning alliance between Israel and the Sunni Arabs.

 

Although Mead supports the need for a Palestinian state, he like most others doesn’t present a roadmap to getting there. Regardless, Mead has offered up a work of history at its best.

For the full Amazon URL see: America's Changing Views on Israel (amazon.com)

 

My Amazon Review of Jay Newman's "Undermoney: A Novel"

 

Rogue Traders

 

Retired hedge fund impresario Jay Newman has written his first novel about a rogue military-backed operation to elect a U.S. Senator as president. Newman is famous for his being the point person for the giant Elliot Management hedge fund’s successful effort to reap billions of dollars profits on Argentina’s defaulted debt. His background in hedge fund operations and international finance allows him to tell a story of corruption in the highest places of finance and politics domestically and internationally.

 

His story evolves a group of special forces operatives in Afghanistan who make a pact to save America from its incompetent leadership. One of their members has become a sitting senator and he becomes their vehicle to become president. Of course, that needs money, and we find them stealing two billion dollars in currency that was air dropped into the Syrian desert to support America’s allies in the region.

 

However, that money had to be laundered and the vehicles they chose was a hedge fund in New York that they plotted to seize control of and a corrupt central banker in Latvia who also happens to launder Russian money as well. The hedge fund is run by the sociopathic Elias Vicker who makes his money by investing in low probability – high impact events based on inside information.

 

Newman’s plot takes us to the Russian-backed Parsifal Group whose business is to create events that would have a huge market impact. As a result, the hedge fund has advanced knowledge of an explosion here, an air disaster there, and a 9/11 styled event. Parsifal profits from its investment in the hedge fund.

 

Along the way we meet the New York hedge fund glitterati, nymphomaniac Russian ballerinas with many of the leading characters found in compromising positions. As an aside Newman mentions how Saudi Arabia’s MBS obtained compromising pictures of Amazon’s Jeff Bezos and how Russian intelligence operatives have infiltrated the highest reaches of American politics, journalism, and finance. How much of this it true along with the Latvian Central Bank acting as a laundromat for the Russian oligarchy, I do not know.

 

At times I found Newman’s plot choppy, but this book represents a very strong first effort.

Fpr the full Amazon URL see: Rogue Traders (amazon.com)

"Corona Virus: Supply Shock and Demand Shock," UCLA Anderson Forecast, March 2020

This forecast was put together on March 1 and represented our thinking at the time. Subsequent to that the Saudi oil price war broke out and the COVID-19 pandemic intensified and the U.S. government policy response has been found wanting. Thus if we were to do the forecast today we would likely have declines in real GDP in the second and third quarters of this year.

The realization that the coronavirus known as COVID-19 has the potential to wreak havoc with the global economy hit the securities markets like a shock wave in the last week of February. Just as we thought that after the signing of the USMCA agreement and the temporary truce in the U.S.-China trade war would put both the U.S. and the global economy on the path to moderate growth in 2020 and beyond, we were struck with the realization that the public health emergency would morph into an economic emergency as portions of the Chinese, South Korean, Japanese and northern Italian economies began to shut down.

What makes COVID-19 different from the prior epidemics SARS (2002-03), MERS (2012), Ebola (1976- ) and especially H1N1 (swine flew of 2009-10 which killed 12,500 Americans alone) is that although less fatal, it is potentially far more contagious. It is in the contagious nature of COVID-19 that triggered the economic shutdowns that have become so disruptive to the global economy. Remember China is far more integrated into the global economy than it was during the SARS epidemic.

In the last week of February the U.S. stock market as measured by the S&P 500 decline by 11.5%, its biggest decline since the height of the financial crisis in October 2008; the yield on the 10-year U.S. Treasury bond dropped 35 basis points to a record low of 1.15% and oil prices plummeted. (See Figures 1, 2 and 3) As a result we tore up the forecast we were about to present and very quickly produced what you are about to read. And as a consequence take this forecast as an attempt to distill incomplete and rapidly evolving information into framework for making reasonable judgments about the future course of the economy.

Figure 1.  S&P 500, 1MAR19 – 28FEB20

Source: BigCharts.com

Figure 2. 10-Year U.S. Treasury Yield, 1MAR19- 28FEB20

Source: BigCharts.com

Figure 3. West Texas Intermediate Crude Oil – Front Month Contract,        1MAR19-28FEB20

BigCharts.com

We view the COVID-19 epidemic and likely pandemic to work as both a supply shock and a demand shock on the economy. It affects supply by shutting down factories making critical products and decreases demand for travel, hotel and recreational services. For modeling purposes we looked at the demand response to the 9/11 event in 2001 to get sense of the magnitudes. On the supply side we looked at the risks to automobile, clothing and capital goods production.

As a result we are assuming a two quarter hit to real GDP growth in the second and third quarters of this year with very modest increases of 1.3% and 0.6% respectively compared the 2% plus growth we previously forecast. (See Figure 3)  That would put 2020 growth on a fourth quarter to fourth quarter basis to a low 1.5%. You can view our forecast as the midpoint between the coronavirus having a very minimal effect to it causing a full blown recession. Time will tell.  Very slow growth combined with the ending of temporary employment associated with the 2020 census will lead to about a drop of 300,000 jobs in the third quarter. Thereafter we anticipate employment growth to resume. (See Figure 4) Concomitantly the unemployment rate is forecast to increase modestly from 3.5% in the first quarter to 3.8% in the third quarter. (See Figure 5) As an aside, do not be misled by the very strong 225,000 job gain reported for January which was influenced by unusually warm weather throughout the country. (See Figure 7)

Figure 4. Real GDP Growth, 2011Q1 -2022Q4, Percent Change, SAAR

Sources: U.S. Department of Commerce and UCLA Anderson Forecast

Figure 5. Payroll Employment, 2011Q1 -2022Q4F, Change in Thousands, SA

  

U.S Bureau of Labor Statistics and UCLA Anderson Forecast

Figure 6. Unemployment Rate, 2011Q1-2022Q4F, Percent SA

Sources: U.S. Bureau of Labor Statistics and UCLA Anderson Forecast

Figure 7. January 2020, Average Temperature Divergence

Source: National Oceanic and Atmospheric Administration

Monetary Policy to Become Super-Accomodative

Monetary policy is not a cure for COVID-19 nor a vaccine for COVID-19. It cannot reopen factories in China or Italy and it cannot convince frightened people to travel, but it might reduce fears that something worse could happen to the economy and might alleviate the pain of stressed business facing supply shortages. We expect that the Fed will cut its benchmark federal funds rate by a full 50 basis points in the second quarter, from the current mid-point of 1.625% to 1.125%. We do note that as of March 2 the futures markets were expecting cuts on the order of 75 basis points.

Figure 8. Federal Funds vs. 10-Year U.S. Treasury Bonds, 2011Q1 – 2022Q4F, Rates

Sources: Federal Reserve Board and UCLA Anderson Forecast

Further the balance sheet expansion process that the Fed undertook last September to solve a “plumbing problem” in the all-important repo market will, instead of winding down as planned, continue.( See Figure 9 ) Simply put the interaction between the Dodd-Frank regulatory regime and Fed’s reserve requirements left the system short of reserves. And although the reserve replenishment programs is not exactly like the three quantitative easing programs of the past decade, it sure looks like it on the chart.

Figure 9. Federal Reserve Bank Assets, 18Dec07 – 26Feb20, In $Millions

Source: Federal Reserve Board via FRED

At least in the short-run the Fed will be able to aggressively ease. Inflation remains quiescent and is likely to remain below its 2% target as measured by the consumption deflator. Here we chart the more familiar consumer price index which runs higher than the deflator.(See Figure 10) Further it is likely that the Fed will make its inflation target symmetric which means that prior undershoots will be offset by an overshoot in the inflation rate meaning that the near term target going forward could very well be 2.5%. Another wrinkle to Fed policy is the potential for Trump acolyte Judy Shelton to receive Senate confirmation for a seat on the Federal Reserve Board.  Put simply, she doesn’t play well with others. However the supply shock coming from COVID-19 and continued trade issues with China have caused many businesses to rethink their global supply chains into thinking more local. Thus over the long run de-globalization may work to increase inflation.

Figure 10. Consumer Price Index vs. Core CPI, 2011Q1-20122Q4F, Percent Change a Year Ago

Sources: Bureau of Labor Statistics and UCLA Anderson Forecast

Consumption Growth Slows to a Crawl and then Rebounds

Since 2014 Consumer spending has been the mainstay of the economy. However the shock of the virus will likely dampened consumer spending in the second and third quarters with growth stalling out at 1.3% and 0.7%, respectively. (Figure 11) Thereafter we expect a rebound with automobile sales lagging as a result of credit problems in that sector.

Figure 11. Real Consumption Expenditures, 2011Q1-2022Q4F, Percent
Change, SAAR

Sources: U.S. Department of Commerce and UCLA Anderson Forecast

Housing Comes Alive

Although far from booming housing starts are ratcheting up on the order of 100,000 units a year. Instead of a previously forecast 1.25 million/year, we now envision starts to come in at somewhat above 1.35 million units a year. (See Figure 12) Rising income and the allure of 3.25% 30-year fixed rate mortgages are beginning to overcome the supply constraints caused by local zoning and do not forget that the low interest rate environment is bringing a torrent of money into the rental apartment market as investors hunt for yield in yield starved world. Indeed, in some states, local zoning restrictions are being relaxed and that in the long run will enable housing starts to return to its historical run rate on the order of 1.4-1.5 million units/year. Far from a boom, but much better than the recent history.

Figure 12. Housing Starts, 2011Q1 – 2022Q4F, In Thousands of Units, SAAR

Sources: U.S. Bureau of the Census and UCLA Anderson Forecast

737-Max Deliveries to Rescue Business Fixed Investment

We are assuming that Boeing’s long grounded 737-MAX airplane will soon be certified to fly and deliveries will start taking place in the third quarter. Thus the full year decline in nonresidential fixed investment will soon come to an end. (See Figure 13) Those deliveries will likely offset the effects coming from the virus. If we are wrong here the outlook for the second half will decidedly worsen. Of course a lion’s share of the gain in fixed investment will be offset by a reduction in inventory levels. Just to note a good part of the recent weakness in this sector is coming from substantial declines in structures for the oil and gas industry as low oil and gas prices weigh on the decade long fracking boom.

Figure 13. Real Business fixed Investment, 2011Q1- 2022Q4, Percent Change, SAAR

Sources: U.S. Department of Commerce and UCLA Anderson Forecast

Government Spending: The Good News and the Bad News

To look at the 3%+ real growth in federal government purchases (excludes entitlements) from 2018-2020 you would think the Democrats were in power, yet under a Republican administration we are witnessing dramatic growth in both defense and nondefense purchases. (See Figure 14) Contrast that to five years of annual declines from 2011-2015 under the prior Democratic administration. As a consequence instead of being a drag on real GDP growth, federal government purchases have been highly stimulative.

Figure 14. Real Federal Government Purchases, 2011Q1 – 2022Q4 F, Percent Change, Annual Data

Sources: U.S. Department of Commerce and UCLA Anderson Forecast

The bad news is that the party will likely end in 2021 as the growth in government purchases crawl to a halt. Here we that the increases in public health spending associated with the virus will not be substantial. Defense spending is peaking and assuming gridlock in Washington in 2021, nondefense spending will be under pressure, but nowhere near the budget cuts the Trump administration has proposed. Further as a result of the late 2017 tax cuts and the increases in spending, the federal deficit will exceed a trillion dollars a year for as far as the eye can see. (See Figure 15)

Figure 15. Federal Deficit, 2011 – 2022F, In $Billions, Annual Data

Sources: U.S. Office of Management and Budget and UCLA Anderson Forecast

Conclusions

The forecast presented herein represents our very preliminary estimate of the impact of the Coronavirus on the U.S. economy. For the time being we view our 1.5% forecast for real GDP growth on a fourth quarter to fourth quarter basis as a midpoint between a minimal effect and a full blown recession. At this stage it is hard to model out the full effects of the supply and demand shocks that are now hitting the economy. In response we anticipate that the Fed will cut its policy rate by 50 basis points from 1.625% to 1.125% and interest rates will remain low for the entire forecast period. The one bright spot in response to the low interest rates will be a much stronger housing market than we previously forecast. Of course it goes without saying that this year’s presidential election, like 2016’s, will increase the risk of untested economic policies being put into place in 2021.

My Amazon Review of Jonathan Conlin's "Mr Five Percent: The Many Lives of Calouste Gulbenkian, The World's Richest Man"

Historian Jonathan Conlin has unfortunately written a very dull biography, at least to this reader, of Calouste Gulbenkian (1869-1955) who was perhaps the founding father of the Middle Eastern oil industry. Coming from an upper-middle class Armenian trading family in the Ottoman Empire and operating out London and Paris, Gulbenkian became one of the major conductors of the global oil industry orchestra.

His friendship with Henri Deterding of Royal Dutch enabled him to meet all of the major players in the industry and helped bring about the merger with Shell. He became known as an “honest broker” and with his knowledge of the region he created what was initially known as the Turkish Petroleum Company which later became Iraq Petroleum. Now get this his partners were Standard Oil of New Jersey/Socony Mobil(now Exxon), Anglo-Iranian Oil (now BP), Compagnie Francaise des Petroles (successor to Deutsche Bank after WWI and now Total) and Royal Dutch/Shell. The four corporate partners each owned 23.75% of Iraq Petroleum and Gulbenkian owned the remaining 5%.

Gulbenkian then authored the famous “Red Line Agreement”  which along with its “self-denial clause” meant that all the parties to agreement would have to conduct their business through Iraq Petroleum (1928). Inside the Red Line were the yet to be discovered oil fields of Saudi Arabia. Thus with the exception of Kuwait, which was outside of the Red Line, Gulbenkian had a claim on 5% of all of the oil discovered in the Middle East. It made him one of the richest people in the world.

Gulbenkian was also involved in oil deals in Venezuela, Mexico, Indonesia and Russia. It is a great story, but somehow it doesn’t leap off the pages.

Conlin discusses Gulbenkian’s giant art collection came into being, some of which was directly obtained from Joseph Stalin. His family was highly dysfunctional to say the least and the 1915 Turkish massacre of Armenians did not seem to affect him. He lived in London and Paris where he had large estates, but he slept in luxury hotels. Along the way he held multiple passports which kept him safe for a while in WWII Paris, before moving on to Lisbon.

As I said from the outset, there is a great story here, but the writing is too dry for my taste.

The full Amazon URL appears at:  https://www.amazon.com/review/R2TY1UJTJWH7WW/ref=pe_1098610_137716200_cm_rv_eml_rv0_rv

OPEC: Looking into the Abyss

OPEC is in crisis. With Brent crude trading at around $45 a barrel, the price of oil has traded lower and for longer than most analysts anticipated since the oil price collapse that began late last year. The oil price shock has brought the Venezuelan economy to its knees, is threatening Saudi Riyal's peg to the dollar and has put Russian economy into recession. Meantime Saudi Arabia, the Gulf states and Russia are fighting expensive wars in Syria and Lebanon. 

Sooner or later something has to give because if nothing comes out of the OPEC meeting scheduled for this Friday, and nothing is expected, there are more than a few analysts who believe that the oil price could fall into the low $30s or perhaps into the $20s. Although OPEC is nowhere near as strong as it once was it still accounts for about 31 million barrels/day  of output, approximately 1/3 of  global production of about 94 million barrels/day which is about 2 million barrels/day too much. Add in Russia's 11 million barrels/day of output you get to about 45% of global production.

My guess is that the current pain that OPEC and Russia are feeling and the prospect of future pain coming from another break in oil prices is too great. OPEC in concert with Russia will act to reduce output. While there was much press commentary about Syria when Putin met with the Saudi Foreign Minister in Moscow a few weeks ago and again when Putin met with the Ayatollah Khamenei in Tehran last week, there was nary a comment on oil prices. It strains the imagination to think that they did not talk about oil prices. Thus the surprise coming out of the OPEC meeting will be recommended cuts in output with the implicit cooperation of Russia. All it would take would be a 5% drop in the combined output of OPEC and Russia to bring supply and demand into balance.

But you would say I am not taking into account the planned increase in Iranian oil exports. I think that is over-rated because Iranian oil is already finding its way into the market outside of the sanctions regime.