An agreement signed with United States in 1945 will continue to haunt House of Saud for ever

I wrote a blog titled “And finally Saudi Arabia bows down before US mantra” on April 10, 2020, where the bottom-line was that Saudi Arabia has bent to knees before United States. Since then I wanted to explore what turned Saudi Arabia too feeble. 

Now I share with you the crux of my finding very briefly.

In my opinion, Saudi Arabia was put to its knees after United States put showed it the details of an agreement in 1945 between Franklin D. Roosevelt, President of United States and the Saudi King at the time, Abdulaziz, which defined the relationship between the two countries for the years to come. 

The deal that was struck between the two men at that time was that the US would receive all of the oil supplies it needed for as long as Saudi Arabia had oil in place, in return for which the U.S. would guarantee the security of the ruling House of Saud.

The deal was altered slightly since the rise of the US shale oil industry. The US also expects the House of Saud to not only supply the US with whatever oil it needs for as long as it can but also that it will also facilitate the US shale industry to continue to function and to grow.

President Donald Trump has used this agreement to the US benefit. He has sensed a lack of understanding on the part of Saudi Arabia for the huge benefit that the US is doing the ruling family. He went to the extent of saying that [Saudi King Salman] would not last in power for two weeks without the backing of the US military. He also made it clear that without the US protection, either Israel or Iran and its proxy operatives and supporters could very soon end the rule of the House of Saud.

Trump has also said, “I will do whatever I have to do... to protect... tens of thousands of energy workers and our great companies,” and added that plans to impose tariffs on Saudi Arabia’s oil exports into the US were “certainly a tool in the toolbox.”

 Putting tariffs on Saudi oil rather than Russian oil made a lot of sense from two key perspectives. First, the US imports around 95% more oil from Saudi than it does from Russia, so sanctioning Russian oil would have little effect on supply glut prevailing in the US. Second, it was also a understanding in the US that Russia was in much better economic shape than Saudi to handle any shocks to its oil-related streams of revenue.

It is also the fact that Saudi currently provides one of the few large-scale sources of sour crude to the US, which is essential to its production of diesel, and to which purpose WTI is less suited. Gulf Coast refinery system of the US has invested heavily in coking systems and other infrastructure to better handle heavier crudes from the Middle East in recent decades.

The other major historical sources are not in a position to fill the gap, with US sanctions still imposed on oil imports from Venezuela, Mexican flows unreliable, and Canada’s pipeline capacity to the US not able to handle anymore exports south until the long-delayed Keystone pipeline is up and running till 2023.

It was strongly believed that Trump would use the threat of such tariffs to convince the Saudis that he is unpredictable enough to impose such taxes, regardless of the short-term economic consequences. As president, he was required to do something as around 44 million barrels of Saudi crude was expected to reach the US over the next four weeks. This was around four times the most recent four-week average, according to EIA records, and it was mostly due to be delivered to the already overwhelmed Cushing delivery point.

Reportedly, Republican Senator Kevin Cramer of North Dakota, who advises Trump on energy issues, has been calling on the White House to take action to stop the very large crude carriers from unloading and several senators and congressmen have threatened to vote to withhold military aid to Saudi Arabia.

Keeping in view the burgeoning ill-feeling towards the Saudis, sources in theUS Administration were desperate to exploit ‘No Oil Producing and Exporting Cartels Act’ (NOPEC). Pressure was building on Trump to finally sign off the NOPEC Bill ever since the Saudis announced to increase output.

The NOPEC Bill would make it illegal to artificially cap oil (and gas) production or to set prices, as OPEC, OPEC+, and Saudi Arabia do. The Bill would also immediately remove the sovereign immunity that presently exists in US courts for OPEC as a group and for each and every one of its individual member states. This would leave Saudi Arabia open to being sued under existing US anti-trust legislation, with its total liability being its estimated US$ one trillion of investments in the US alone.

The would have also entitled the US administration to freeze all Saudi bank accounts in United States, seize its assets in the country, and halt all use of US currency by the Saudis anywhere in the world. It would have also allowed the US to go after Saudi Aramco and its assets and funds, as it is still a majority state-owned production and trading vehicle, and ment that Aramco could be ordered to break itself up into smaller, constituent companies that are not deemed to break competition rules in the oil, gas, and petrochemicals sectors or to influence the oil price.

The Bill came very close indeed to being passed into a law in February of last year, when the House Judiciary Committee passed the NOPEC Act, which cleared the way for a vote on the Bill before the full House of Representatives. On the same day, Democrats Patrick Leahy and Amy Klobuchar and – most remarkably – two Republicans, Chuck Grassley and Mike Lee, introduced the NOPEC Bill to the Senate. Its progress was only halted after President Trump stepped in and vetoed it when the Saudis did what he told them to do, but the option is still available for a relatively quick turning it into law.

And finally Saudi Arabia bows down before US mantra

The decision by OPEC plus to cut production can be termed a time-out to avert a tripartite war. Lately, there has been significant deterioration in relations between the United States and Saudi Arabia.

Reportedly, nearly 50 US Republican lawmakers warned Saudi Crown Prince Mohammed bin Salman on the eve of this week’s OPEC oil ministers’ video-conference that economic and military cooperation between the United States and Saudi Arabia was at risk. The congressmen demanded that the kingdom must convince Russia to save oil marker from a collapsed.

The United Arab Emirates (UAE) had joined Saudi Arabia in raising production in a move that was sparked by Russia’s initial refusal to extend production cuts agreed early this year but more fundamentally was designed to knock out competition from US shale producers that had turned the United States into the world’s largest oil producer.

It is being portrayed that Saudi Arabia, Russia and the UAE share a desire to render the US shale industry uncompetitive. The prime objective of Russia is to end the US hegemony by stripping it off its status of largest oil producing country.

The threats for Arabian Peninsula monarchs and the US have been raised by the collapse of the oil price as well as demand in the midst of a global economic meltdown.

For Saudi Arabia and the UAE, the stakes were their relationship with the US and significant reputational damage with a move that put at risk tens of millions of American jobs at a time more than 17 million people have been rendered jobless in the United States in the past four weeks.

Oil is but the tip of an iceberg in efforts, particularly in the case of the UAE, to manage a divergence in interests with the United States without tarnishing the country’s carefully groomed image as one of Washington’s closest allies in the Middle East.

Emirati gestures were designed to ensure that it would not be a target in any military confrontation between the United States and Iran.

However, when UAE began reaching out to Iran last year by sending a coast guard delegation to Tehran to discuss maritime security in the wake of alleged Iranian attacks on oil tankers off the coast of the Emirate, the relationship got bitter.

The Trump administration remained silent when the UAE last October released US$700 million in frozen Iranian assets that ran counter to US efforts to strangle Iran economically with harsh sanctions.

While the United States reportedly blocked an Iranian request for US$5 billion from the International Monetary Fund (IMF) to fight the virus, the UAE was among the first nations to facilitate aid shipments to the Islamic republic.

The shipments led to a rare March 15 telephonic conversation between UAE foreign minister Abdullah bin Zayed bin Sultan Al Nahyan and his Iranian counterpart, Mohammad Javid Zarif.

UAE officials stressed that there would be no real breakthrough in Emirati-Iranian relations as long as Iran supported proxies like Hezbollah in Lebanon, pro-Iranian militias in Iraq and Houth rebels in Yemen. The UAE gesture contrasted starkly with a Saudi refusal to capitalize on the pandemic.

A against this, Saudi Arabia appeared to reinforce battle lines by accusing Iran of “direct responsibility” for the spread of the virus. Government-controlled media charged that Iran’s allies, Qatar and Turkey, had deliberately mismanaged the crisis.

Moreover, the kingdom, backing a US refusal to ease sanctioning of Iran, prevented the Non-Aligned Movement from condemning the Trump administration’s hard line.

In a further indication of a divergence of interests, the UAE was alleged for trying to sabotage US support for Turkey’s military intervention in northern Syria as well as a Turkish-Russian engineered ceasefire in the region.

It was also reported that UAE Crown Prince Mohammed bin Zayed had promised Syrian President Bashar al-Assad US$3 billion, out of this US$250 million were paid upfront to break the ceasefire in Idlib, one of the last rebel strongholds in Syria.

Prince Mohammed had hoped to tie Turkey up in fighting in Syria, which would complicate Turkish military support for the internationally recognized Libyan government in Tripoli. The UAE aids Libyan rebel forces led by Field Marshal Khalifa Haftar.

A tweet by Prince Mohammed on 28th March declaring support for Syria in the fight against the coronavirus was designed to keep secret the real reason for the UAE payment.

“I discussed with Syrian President Bashar al-Assad by phone the repercussions of the spread of the coronavirus and assured him of the UAE’s support of and assistance for the brotherly Syrian people in these exceptional circumstances. Human solidarity in times of adversity supersedes all else, Sisterly Syria will not be alone in these difficult circumstances,” Prince Mohammed said. It is unlikely that Prince Mohammed’s explanations will convince policymakers in Washington.

Nevertheless, the United States, Saudi Arabia and the UAE are likely to hide cracks in their relations, but it is only a matter of time the cracks will re-appear.

Pakistan Stock Exchange outperforms other global equity benchmarks WoW basis

Continuing the momentum gained in the latter part of last week, the benchmark index of Pakistan Stock Exchange (PSX) closed the week ended on 3rd April 2020 at 31,622 points, posting 12.5%WoW gain. It was the highest ever in points gain, (up 3,512 points WoW) and highest weekly gain in percentage terms since February 2000, outperforming other global equity benchmarks on weekly basis. Across the board attractive valuations, cabinet approval of the stimulus package announced last week and kick-start of essential industries in the coming week (another incentive package for Construction sector announced on Friday) aided investor sentiment in tandem with encouraging news flow regarding number of recoveries from coronavirus. For the week top gainers included: ASTL, CHCC, MLCF, PIOC and KAPCO.

As a result, average traded volume jumped to 227.7 million shares, from 150.0 million shares traded a week ago. Within main board items, Cements led the show, gaining 26.0%WoW on expectation of the construction sector incentive package and news flow suggesting initiation of construction activities at Diamer Bhasha dam. It was followed by E&Ps/OMCs gaining 15.7/23.2%WoW, on Brent price rising more than 30% in anticipation of deal between Saudi Arabia and Russia. Flow wise, net buyers were Individuals (US$13.0 million), Mutual Funds (US$10.3 million), and Insurance (US$9.0 million), mostly absorbing sale by foreigners (US$36.1 million).

On the international front, global institutional investors continue to sell despite undemanding valuations driven by redemption pressures across both active and passive investment strategies. At the same sovereign allocators of global capital are also calling in redemptions due to calls for support from respective governments to fund relief measures as economies face various levels of impacts due to the virus outbreak. A fresh round of allocations may only be likely over the medium to longer term as economies only gradually reopen within the backdrop of large scale stimulus programs launched by central banks. Stimulus programs will eventually translate into higher risk tolerance improving allocations towards frontier and emerging markets.

Analysts advocate buy-and-hold investment strategy with a long term investment horizon since the impact of coronavirus outbreak is yet to be completely gauged. They also suggest continuing to monitor data regarding the virus, testing capacity augmentation, provincial measures to mandate social distancing (including length and severity of lockdowns.

A bruising day for US Dollar

Thursday could be a bruising day for US Dollar. One of the reasons investors are liquidating their positions is depressing news. It is also anticipated that social distancing rules may be extended to April 30th, which delays the return to normal business activity. With the focus on US data this week, a disappointing jobless claims or non-farm payrolls report could also send USD reeling against other currencies.

If the first day of April 2020 was an indication of what’s to come, it will be a very rocky second quarter. After falling more than 24% during the first quarter, the Dow Jones Industrial Average plunged. Currencies have been taking their lead from equities, so it was no surprise to see some of the currencies falling against the greenback. The strongest currencies continue to be the USD and JPY – which absorbed all of the gains in the first quarter.

However the supremacy of the USD is likely to come into question in the weeks ahead. Investors have been buying it on the premise that the rest of the world will be stuck in recessionary conditions longer than the United States because there can’t be a global recovery without a US recovery. While that may be true, the data coming from many countries is weak. The spread of coronavirus in United States is alarming and lockdown is becoming a serious concern.

Looking ahead to Friday’s non-farm payrolls report, it could it be even worse. In many ways tomorrow’s jobless claims report will be more telling and more market moving. The current forecast is 3.5 million, which sounds about right but the underlying numbers are probably much worse. 

According to New York State Labor Department, between March 23rd and March 28th, the agency received more than 8.2 million calls compared to just 50,000 in a typical week. Of course many of those calls are redundant but with just one state receiving that many requests, we can only imagine how many claims are being requested and filed nationally. 

With the exception of JPY, all of the major currencies are lower against USD. Despite an unexpectedly strong increase in German retail sales, Eurozone PMIs were revised lower. UK PMI was also revised lower.  Although manufacturing activity increased in March according to Australia’s PMI report, the RBA minutes were very dovish. According to the central bank a very material contraction is expected in Australia with significant job losses over the months ahead.

Is rebound in oil prices sustainable?

Some hopes were created on Tuesday after U.S. President Donald Trump and Russian President Vladimir Putin agreed to talks to stabilize energy markets, with benchmarks climbing off 18-year lows hit as the coronavirus outbreak cut fuel demand worldwide.

Trump and Putin agreed during a phone call to have their top energy officials discuss stabilizing oil markets, the Kremlin said on Monday. On this flimsiest pretext, oil prices are showing signs of clawing back from a near 18-year low.

Expectations were partly marred when crude oil benchmarks opened April mixed on Wednesday, following their biggest-ever quarterly and monthly losses, overshadowed by fears of global oversupply as data showed a bigger-than-expected rise in inventories in the United States. Brent futures were traded at US$26.14/barrel by 0032 GMT, while WTI futures were traded at US$20.75.

Opening session of today left oil prices marooned near their lowest levels since 2002 amid the global coronavirus pandemic that has brought worldwide economic slowdown and slashed oil demand. Crude futures ended the quarter down nearly 70% after record losses in March.

Added to the trauma was rise in US crude inventories, up by 10.5 million barrels last week, far exceeding forecasts for a 4 million barrel build-up, indicated by data from industry group the American Petroleum Institute.

Oil slumped to a 17-year low as coronavirus lockdowns cascaded through the world’s largest economies, leaving the market overwhelmed by plummeting demand and piling up crude inventories.

Physical oil markets are struggling to store fuel, hit by a double whammy of lockouts and shrinking demand. Western media is portraying it a war for market share between Saudi Arabia and Russia.

The world normally uses 100 million barrels of oil day, but forecasters predict as much as a quarter of that has disappeared in just a few weeks. The plunge in consumption is unprecedented. The great crash of 1929, the twin oil shocks of the 1970s and the global financial crisis don’t come close.

Global oil demand is in freefall and consumption may decline by as much as 20 million barrels a day, according to the International Energy Administration.

The bearish mood in the market hasn’t improved by a rift within the Organization of the Petroleum Exporting Countries (OPEC). Saudi Arabia and other members of OPEC were unable to come to an agreement on Tuesday to meet in April to discuss sliding prices.

It is very unlikely that OPEC, with or without Russia or the United States, will agree to production cut to contain global crude oil glut, mainly due to record production by the United States.

Unhinged Foreign Policy of United States

UN Secretary General Antonio Guterres has called for an "immediate global ceasefire" to focus on fighting Covid-19. He has appealed for the "waiving of sanctions that can undermine countries' capacity to respond to the pandemic." But Washington is not listening. Requests from Venezuela and Iran for emergency IMF loans to buy medical supplies were blocked by U.S. interventions.

The Trump administration is reacting to the pandemic stress by lashing out at perceived internal and external enemies. Secretary of State Mike Pompeo is leading the external onslaught.

Just a month ago Pompeo announced an increase of sanctions against Iran. The sanctions block money transfers. They make it impossible for Iran to import the medical equipment it urgently needs to counter the epidemic.

While the US renewed the sanction waiver which allows Iraq to import electricity and gas from Iran, the waiver is now limited to only 30 days. One third of Iraq's electricity depends on those imports from Iran and, if the waiver is not renewed, its hospitals will go dark just when the epidemic will reach its zenith.

Parts of the Trump administration are even pressing for a wider war against alleged Iranian proxy forces in Iraq.

The Pentagon has ordered military commanders to plan for an escalation of American combat in Iraq, issuing a directive last week to prepare a campaign to destroy an Iranian-backed militia group that has threatened more attacks against American troops.

But the United States’ top commander in Iraq has warned that such a campaign could be bloody and counterproductive and risks war with Iran.

Some top officials, including Secretary of State Mike Pompeo and Robert C. O’Brien, the national security adviser, have been pushing for aggressive new action against Iran and its proxy forces — and see an opportunity to try to destroy Iranian-backed militia groups in Iraq as leaders in Iran are distracted by the pandemic crisis in their country.

Military leaders, including Defense Secretary Mark T. Esper and Gen. Mark A. Milley, the chairman of the Joint Chiefs of Staff, have been wary of a sharp military escalation, warning it could further destabilize the Middle East at a time when President Trump has said he hopes to reduce the number of American troops in the region.

The plan is lunatic. One can’t "destroy" Kataib Hezbollah and other Iraqi Shia groups which Iran helped to build during the war against ISIS. These groups are part of political parties with deep roots in the Iraqi society.

France, Italy and the Czech Republic have started to withdraw from Iraq. Denmark is also leaving and the UK is removing 50% of its force.

There are less then 5,000 US soldiers in Iraq and a war on Kataib Hezbollah could mobilized hundreds of thousands Iraqis to fight against the US occupation. Such a war would also involve Iran and the US would certainly lose it.

The US has currently two aircraft carrier groups in the Arab sea to threaten Iran. But those ships are of no use right now. They are 'cruise ships with guns'. Nuclear powered five billion dollar Petri Dishes for novel coronavirus outbreaks.

Two US carrier groups in the Pacific are already out of action because they have larger outbreaks on board. It is only a question of time until the other carriers follow.

It is not only Iraq and Iran the US is aiming at. The US State Department cut its contributions to health care in Yemen just in time of the highest need:

Officials with the United States Agency for International Development said the decision to halt funding, reported earlier by The Washington Post, included exceptions for “critical, lifesaving activities, including treatment of malnutrition as well as water, sanitation and hygiene programs aimed at keeping people healthy and staving off disease.”

But humanitarian officials said the agency’s exceptions did not provide for continued funding of basic health care programs, which are heavily reliant on foreign aid, and did not seem to take into account what might occur when the coronavirus begins to spread.

Coronavirus: Pandemic, Biological war or Azab (torment)

Ever since coronavirus has attacked Pakistan all sorts of explanations are being given, but mostly end at ‘it is a virus and no vaccine or treatment is available’. First it was said people should restrict socializing and now government is being asked to impose complete lockdown.

The point being propagated is that the victim will face death; therefore, lockdown is the most appropriate.

Since the lockdown can bring even the most robust economies to stand still, various bailout packages are being prepared by the multilateral donors.

To save the less developed economies, economic powers have developed consensus to offer US$2 trillion package.

This reminds formation of International Bank for Reconstruction and Development, now known as World Bank

While many still don’t believe, a small group has been saying from day one that it’s a biological war. The virus has a stipulated life and after a while all the cities and countries will be declared ‘clean’.

It is estimated that around 25,000 people have died in three months, but a point to be remembers is that the largest number of deaths are in the countries which have one of the best Medicare systems in the world.

This number may look colossal but it is only a miniscule keeping in view the loss of millions of lives in WWII.

During this virus spread, faith of Muslims, Christians and Jews was also jolted as their places of worship were closed. Followers of these religions were terming this pandemic an Azab and they were made to believe the contrary.

It becomes easy to believe that it is a biological war when one looks as the ‘disinformation’ spread by three global news agencies. The ‘embedded’ journalist reported global outbreak so extensively that achieve ultimate goal ‘lockdown’ became too easy.  

Let me conclude that this virus may also have become out of control, keep in mind many of the science fictions, and you will tend to agree with my briefest narrative.