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Old 11-20-2016, 01:40 PM   #1
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Default GCC Regional Update

Thought that perhaps TBM folks might find this interesting. Could have been posted in any of several different places, but, since I come at the subject from an O&G investment standpoint, and energy cost/security are the general points of relevance for TBMers as well, I'll put it here. From one of the energy boards. Reformatted for clarity. - d

Just thought I would provide some feedback on the status of the region as I see it. I can't cite my sources, so please view this as an opinion statement, and nothing more.

Saudi Arabia is not doing well at all in Yemen. They are frustrated with their performance and so they are purposely loosening measures designed to reduce collateral damage. That's why you are seeing so many Yemeni civilians getting caught in the crossfire. The Iranian strategists have done their job in training the Houthis in the art of guerrilla and asymmetric warfare. Yemeni rebels freely and boldly penetrate Saudi's southern border towns. The Saudis have tried everything from extensive use of air power to abandoning positions and then counter striking, and most lately shipping some of the Syrian rebels to their southern border to fight the Yemeni forces. Nothing is working.

Qatar is now reticent about further support for this war and the UAE has all but pulled out. They have taken massive casualties that are not reported publicly. More and more, they are resorting to employing South American and African mercenaries to fight on their behalf, but they have encountered unique problems with this strategy (for example, Colombians demanding 6 figure salaries in order to continue, and, understandably, a lack of enthusiasm to fight a war you are not ideologically tied to).

In Syria, the results of Saudi Arabia and Qatar's interference (the UAE refused to aid forces affiliated with Al Qaed/Nusra/IS) has been unimpressive. While they have seriously degraded the combined Syrian government/Hezbollah/Iranian coalition, the fact is that they are no match for those fighting for their country.

Many of the rebels are not Syrian at all. They only fight because they are on the run, high on drugs and have no choice. They can't disband or refuse orders. They have a major disadvantage, which is that they have no air cover. In fact, the Russian air force has obliterated all of their heavy equipment and strategic capability. They can now only serve as a tactical nuisance. Deadly, yes, but not effective enough to win the war.

Turkey has read the writing on the wall, and is repositioning itself into a defensive posture. Whereas it had ambitions to hold ground in north and especially eastern Syria to counter their perennial nemesis (Kurdish resistance), it is now hoping to create a buffer zone between it and Syria in order to keep out the terrorists it has helped develop thus far.

The detente with Russia has also played a role in this development, but the overarching reason for this change in posture is that it views the US position as untenable and doesn't want to be seen as a loser along with Obama's tepid, half-assed interference in Syria that will surely go down in history as a political and military failure.

As if losing on these two fronts was not bad enough news for Saudi Arabia, a significant loss has been their man in Lebanon. Saad-Al-Hariri, the son of the late Rafiq-Al-Hariri. He was basically Saudi's biggest stooge in Lebanon, but that is no longer the case. Saad had been hiding in France over the last two years as he lost control of his own platform in Lebanon, but he took the opportunity to surrender to opposing forces (some of them quite threatening) by giving up his paymaster. He struck a deal to drop Saudi Arabia as a sponsor and returned home to help his enemies form an inclusive government. He even shaved his Saudi-style goatee to signal that he was done with that chapter.

These developments have left Saudi Arabia very much alone. Their on-again, off-again attempts at working with the Israelis has had very limited success as they only have so much common ground with which to work on. And while they tried to work closely with Egypt, they are very much at odds with regard to the Muslim brotherhood which the Egyptians cite as their number 1 enemy. And of course, there are the long standing rivalries and tensions with their closest allies, Qatar and the UAE. While in public they are very good friends, they have both historical grudges and present day disagreements that keep them wary of each other.

Qatar is trying to assert independence from, and superior politics to, the house of Saudi. Something that irks the Saudis to no end. The UAE is much more liberal than Saudi Arabia and has grand plans to continue to develop their nation in that direction, which contradicts the strict Wahhabi concept. Also, the UAE considers Saudi Arabia responsible for dragging them into the Yemen war which not only was very costly in blood and treasure, but critically has altered their relationship with the Yemenis for good. A good proportion of the UAE population is of Yemeni origin, and so this war, while it was recognized to be a struggle with Shiite influence, was not very popular to start with, and has become less so over time.

The bottom line for us oil investors, is to understand that the situation in the Persian Gulf is complex, and is more fractured than it ever was. We have ongoing hot wars, an overextended down-cycle in the oil industry and an extremely negative reading with regard to sentiment, which is hurting the non-oil portion of the regional economies as well. We have an emboldened Iran with a fresh cash infusion and an axe to grind.

Saudi Arabia suddenly (at least over the course of the last 9 months) has found itself on the defensive. It really doesn't have much choice but to cut production even if it has to do so unilaterally. Of course, the UAE, Kuwait and Qatar will join it, and that will be all that it needs. Anything above and beyond that is gravy.

Saudi Arabia has already experienced a few sovereign credit downgrades, has had to issue a number of bond offerings, has burned ridiculous amounts of foreign reserves propping up its currency, and has liquidated enough assets to set them back a few years worth of savings. Their people are worse off, and starting to get pissed. They have not only lost offensive wars, but also their long-standing and covert influence over the Sunni nations in the Middle East.

They may have been in denial of their true state of affairs ever since November 2014, but right now they are very acutely aware of the fact that they cannot withstand much more pain, and to attempt to do so will be to tempt fate in an irresponsible way. They made a mistake in vying for market share (a thinly veiled cover for attempting to bankrupt its competitors), instead of recognizing a tectonic and systemic shift in the crude market. I don't see how anyone in their right mind can make this mistake again. Then again, having lived in the Middle East for so long, I know that absolutely anything is possible. Especially matters related to ego.

Last edited by dharma; 11-20-2016 at 01:59 PM. Reason: sloppy prose on my part
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Old 11-21-2016, 10:05 AM   #2
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Almost didn't read this, but I am glad that I did.

I agree with what you're saying here. I said back in January of 2015 that if the Saudis were foolish enough to send in ground troops they'd still be there a year later and there they are.
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Old 11-21-2016, 10:32 AM   #3
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My apologies if I made it sound like this was my work. As I noted, this comes from one of the energy boards, and was written by an expat Saudi who still does business in the Mideast and has a host of contacts there. I do not pretend to this level of inside knowledge.
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