With the US closed trading was thin and the underlying sentiment remains buoyant and hopeful. In a welcome development the product contracts rose significantly with ICE Gasoil now firmly in backwardation. At the same time both WTI and Brent drifted gently south and the resultant strengthening of assorted crack spreads provides a healthy dose of encouragement for those who have been expecting improvements on the demand side of the oil coin. Today’s EIA statistics will be eagerly watched for further signs of potential stock draws.

And so will the interest rate decisions from the Swiss, the Norwegian and the UK central banks this morning, amongst which only the Swiss National Bank is forecast to cut rates although the Bank of England might also be tempted as headline inflation hit the 2% target in May. For now, investors’ confidence persists uninterrupted.

The Complexity of the Dollar

Around 100 countries and organizations participated in last week’s Ukraine peace conference at the Swiss resort of Bürgenstock. As with most conferences there was a final declaration to be signed at the end of the get-together on Sunday evening, which re-affirmed the territorial integrity of Ukraine and emphasized the need of continuous dialogue between all parties to end the conflict. There was, however, no consensus on several issues including on how and when Russia should be involved in resolving its devious war against Ukraine. Out of the total the majority decided to agree on the final declaration. The list of those who provided no support is telling. Amongst others, Brazil, India, Saudi Arabia, South Africa and the United Arab Emirates decided not to embrace the communique. Note, that they are actual or perspective BRICS countries with China and Russia being notable absentees. Most of these countries pursue strong economic relationship with Ukraine’s invader.

The above list discernibly indicates the fault lines in the developing bi- or even multi-polar world order. The Saudi commitment towards Russia is especially intriguing but not surprising. Ever since the birth of the US shale industry and its declining reliance on foreign oil the strategic alliance between Saudi Arabia and the US has weakened considerably. The Persian Gulf OPEC juggernaut turned towards China who is a reliable buyer of its crude oil and in 2016 invited Russia to participate in the enlarged OPEC+ producer group. It is against this backdrop that reports of the expiry of the so-called petrodollar deal struck between Saudi Arabia and the US in 1974 emerged lately. This agreement apparently allowed the Kingdom to settle its oil sales exclusively in US dollars. The non-renewal of the accord, therefore, is to have considerable implications for the role the dollar plays on the international stage.
As salient as the expiry of the deal sounds, it is factually incorrect, such an agreement does not exist. There was, in fact, a deal between the two nations in 1974 but it regulated the sale of US high tech weapons to Saudi Arabia in exchange of the latter to invest its excess cash in US Treasuries. As some reports have it, in the 1980s Saudi Arabia owned close to 30% of the US debt.

Consequently, fears of the weakening significance of the dollar in worldwide trade is proving widely exaggerated. The role of the US dollar in global transactions, albeit less dominant than before, is still unquestionable. Around 59% of international payments are made in USD when transactions between euro zone countries are not taken into account. More significantly, the IMF estimates that 58% of currency holdings of governments and central banks are in dollars, followed by 20% in euro and a mere 2% in renminbi with China coming sixth on this list.

Back to the unsubstantiated rumors, to a certain extent it is irrelevant whether there is a ‘petrodollar’ agreement between the US and Saudi Arabia or not as the Saudi riyal is pegged to the dollar therefore it has every incentive to stick to the greenback. The inaccurate reports imply that the Kingdom is now all of a sudden able to sell its oil in other currency that the dollar, but it was always free to do so – it has chosen not to. Undoubtedly, China, as a major Saudi oil buyer has been growing in importance for the Middle East powerhouse and has overtaken the US from this respect. Consequently, pricing Saudi oil in other currencies cannot be ruled out but limitations of such a move are conspicuous.

There is serious vested interest from both the US and the Saudis to maintain predictable political and economic connections. After a spectacular fallout at the beginning of the Biden presidency the relationship between the countries has normalized; in a way it has become pragmatic and transactional. The US reliance on Saudi oil has severely diminished but the OPEC producer’s market management policy still tangibly affects US retail gasoline prices. In a much broader context, the US-Saudi defense pact, which would include US security guarantees to the Kingdom and co-operation on a civilian nuclear programme in exchange for normalizing Saudi-Israeli ties eventually leading to the Palestinian statehood, regional stability, and which suffered a setback after the terrorist attack on Israel on October 7, 2023 is the ultimate prize for both countries; it is meant to reshape the political landscape of the region. The Saudi flirtation with the BRICS group can be viewed as a bargaining chip in negotiating the security pact, yet it appears that the Kingdom’ fundamental interest is to maintain good relationship with the US and vice versa, stick to the dollar and let China and other nations to do the background work and challenge the dollar’s dominance any way they see fit.

Overnight Pricing

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