May 20, 2019 05:27 PM RSS

Vladimir Putin's Waterloo or Renaissance?

  • Wall Street Rebel | James DiGeorgia
  • 03/11/2016 05:19 PM
Vladimir Putin's Waterloo or Renaissance?

An interesting article appeared on oilprice.com this week written by Rakesh Upadhyay that opines the idea that Russian efforts to negotiate an oil export cap agreement among both OPEC and Non OPEC oil producing states is possibly a first step to gaining enough power and influence in the Middle-East to eventually control 73% of the world's oil supply.



Vladimir Putin would love to be the ultimate power broker in the Middle-East. However, I don't expect that is going to happen unless, of course, Donald Trump winds up winning in November. Who knows? "The Donald" might be crazy enough to gift the Middle-East and Eastern Europe to Putin after being inaugurated President.

Short of a Trump Presidency, the best Russia and Putin can hope for is an export cap agreement that successfully freezes exports at January 2016 levels. Getting an actual export cut of 1.5 to 2 million barrels is going require a much bigger negotiation.

If Russia actually had the influence and power to really control almost three quarters of the global oil supply, oil would already be trading a lot closer to US$60 per barrel than US$35.

No argument Putin is trying to gain influence with Saudi Arabia and with the Sunni Kingdoms:

  • Russia is likely forcing the Assad regime to maintain the negotiated cease fire with its western backed enemies.
  • News reports also indicate Russia has shifted its air attacks exclusively towards ISIS and ISIS aligned targets in Syria. This could keep Saudi Troops out of Syria.
  • Russia's decision not to sell S-300 Missiles to Iran is also in deference to Saudi concerns over Iran's nuclear program. Holding off on the S-300 sale leaves Iran's nuclear facilities vulnerable to Western bombardment if the Persian state violates its nuclear commitments.
All three Russian efforts above to calm hostilities and strike at ISIS et al. should result in the first big Saudi Arabian purchase of Russian military ammunition and weapons systems in decades. The very first purchase should amount to US$10 billion.

The Saudi military purchase is expected to be announced shortly after the Saudi Oil Minister officially announces an oil export cap deal has been sealed. An announcement and event that we are likely to see take place in Moscow, not Riyadh.

An oil export cap agreement may lead to higher oil prices, but let’s not get carried away and accept the idea that a new oil cartel headed by Russia has become a reality.

Even if a new "oil cartel" evolved, it doesn't mean Russia would have any real control of the majority of the world's oil supplies.

Russia can only exercise control by independently cutting its exports by 1 to as much as 2 million barrels a day. Trust me; Putin much prefers the Saudi's and OPEC make the cuts and the sacrifice. So, that's his game plan.

Russia, by leveraging its influence over the Assad regime and Iran, may be able to calm the 1200 year old Sunni - Shia war long enough to negotiate the coordinated oil export production freeze (cap) it wants.

Then, Russia may even be able to successfully negotiate a series of equally shared strategic cuts in oil exports in order to push crude oil prices higher.

The Russians (Soviets) after all, were actually able to push diamond prices higher for decades, thanks to the communists’ willingness to negotiate caps on diamond sales. The Soviets actually cooperated with one of the most capitalist Cartels to ever exist -- the DeBeers Diamond Cartel.

Russia has also worked with other natural resource producers and quasi cartels around the world to strategically limit global sales of commodities like nickel, platinum, and fertilizer to name just a few.

While Russia has enjoyed periods of success in manipulating commodity prices higher, they have also been notorious in causing sudden price collapses -- because of their greed.

Allowing Potash prices to get too high resulted in massive new production of Potash, which lead to a supply glut and spectacular price collapse.

Any knowledgeable oil analyst will tell you if oil is driven back up too high over the US$60-$70 range for any extended period, substantial new oil production will come back on line in North and South America.

Russia's influence over the price of oil is extremely limited and price sensitive.

Russia's influence also comes at a great deal of risk. Getting in too deep in the chaos of the Middle-East could wind up trapping the Russian bear in a bigger and longer nightmare than Russia's Afghanistan misery which lead to the Soviet collapse.

Too much exposure and influence in the Middle-East would also make Russia as much or more of a prized target of Jihadists than the United States.

Yes, if Russia is able to balance its relationship between Saudi Arabia, Sunni Oil Kingdoms, and Syria and Iran, it will have a good chance of having enough influence to engineer both the export freeze agreement it wants and the needed cuts in oil sales to the market, to keep oil prices between US$50 and US$60 in 2017. Just high enough to balance Russian and Saudi checkbooks, but not high enough to spur a massive resurgence in shale oil development and production.

As much as Russia's President Putin wants to remain one of the most powerful men in the world, it isn't likely that he can gain enough power, even as the head of a new all powerful global oil cartel, to attain his dreams of world domination.

The best Putin can hope for is the influence and ability to nudge most of the 73% of global oil supply to stick to negotiated export targets, making the range of crude oil between US$50 and US$60 a barrel.

Remember, US$50 is crucial for Putin's government. It has based its domestic and military budgets on US$50 oil; and crude oil closed at US$36.63 yesterday. For the time being, it isn't looking like a Putin Renaissance. Rather it’s, is the continued low price of oil looking more like a potential Waterloo?

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