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The Cartel Bursts

01.06.2015

OPEC meeting on Friday this week is fateful for Norway and other petroleum exporting nations. We lean towards that the Sunni-Shia conflict has damaged the cooperation climate so severely that the cartel in practice is dead.

It is not easy to cooperate in one area while attempting to kill each another. In Iraq, Syria and Yemen Sunni and Shiite Muslims are fighting against each other with brutality that is second to none.

The civil war in these countries reflects an increasingly bitter conflict between Sunni and Shiite Muslims for the supremacy in the Middle East.

On the Sunni Muslim side the lodestar is Saudi Arabia. Secret documents published by Wikileaks state that the kingdom has repeatedly asked the United States to "cut the head of the snake", another word for Iran.

Iran supports the Shia Muslim governments in Iraq and Syria with weapons, soldiers and money. The Iranians also provide military support to the rebels in Yemen that Saudi Arabia is bombing.

The Shia bloc

At the OPEC meeting this week Iran and Iraq, the Shiite bloc, will argue for cuts. Both countries are on the brink of fiscal bankruptcy and desperately need higher oil prices, not least to fund costly wars.

Meanwhile Iran and Iraq exclude themselves from the production cuts. Because of war and sanctions, the production is well below historical levels and therefore both countries consider themselves as being relieved of the quota system.

Starve tactics

The question is whether Saudi Arabia and the other Gulf states are willing to cut the production of its "Sunni oil" so that Iran and Iraq can sell more of its "Shia oil" at a higher price.

We doubt that the Saudi sheikhs will feed the snake who wants to eat them. On the contrary, they will probably do everything possible to starve it to death.

The most effective way to do this is to flood the world market with crude oil. Saudi Arabia and the Gulf states can live for a long time on savings. Iran and Iraq cannot.

Bad news for Norway

We therefore think that this week's OPEC meeting will end the same way as the previous one. There will be no deal.

Saudi Arabia will continue to raise its output quietly to harm the Shiite bloc, while Iran and Iraq will produce all they can.

If we are right in this analysis, it is exceedingly bad news for Norway. The phase with extremely low oil prices may last longer than previously thought.

Dovre portfolio

  • Kongsberg Automotive
  • Nordic Nanovector
  • Marine Harvest
  • Aqua Bio Technology
  • Noreco
  • Wilh. Wilhelmsen ASA

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