WSJ : Tension Between Iran and Saudi Arabia Presents New Test for OPEC

Tension Between Iran and Saudi Arabia Presents New Test for OPEC

Diplomatic crisis comes amid a sharp tumble in oil prices

LONDON—The diplomatic crisis between Saudi Arabia and Iran presents a new test for the Organization of the Petroleum Exporting Countries at a particularly challenging time for the oil-producing cartel.

The 13-nation group that controls more than a third of the world’s oil supplies has been able to function in the past even when its members were at war. Iraq and Iran sent representatives to OPEC meetings during their war in the 1980s, and Saddam Hussein’s oil officials sat at the table with representatives of Kuwait’s exiled government after Iraq invaded in 1990.

But the confrontation over Saudi Arabia’s execution of a prominent Shiite cleric, Nemer al-Nemer, could prove to be an even trickier situation for OPEC because of the sectarian anger it has unleashed across the Middle East in countries whose economies have been slammed by depressed oil prices. Saudi Arabia is primarily a Sunni Muslim country, while Iran is mostly Shiite.

Other Sunni Muslim countries, including OPEC member, the United Arab Emirates, followed Riyadh in cutting off diplomatic ties with Iran after Saudi Arabia’s embassy was set on fire by protesters in Tehran.

Meanwhile, religious and political leaders in Shiite-majority OPEC member Iraq have criticized Saudi Arabia for the execution of the cleric.

“We have not encountered a similar situation before,” said one OPEC delegate from a Persian Gulf Arab country.

The difference this time, the delegate said, was resilient American oil production, which has kept crude markets flooded and prevented OPEC from using its main tool for calming markets: regulating oil output flows. Prices have crashed by more than 60% over the past 18 months, trading at less than $38 a barrel on Monday.

Saudi Arabia and Iran—arguably the two most powerful OPEC members—were already at odds over oil-production policy.
Iran is expected to boost international exports of its crude early this year after the likely end of western sanctions over its nuclear program. At last month’s OPEC meeting in Vienna, Iranian officials called for other members to pull back production so that crude prices don’t fall further when Iranian crude comes rushing back to the global market. Saudi Arabia rejected those calls and OPEC gave up all pretense of controlling output, abandoning its production target of 30 million barrels a day. Iranian oil minister Bijan Zanganeh was visibly upset when he left the meeting.

Saudi Arabia has pumped at record levels over the past year and encouraged other members to do so as well, a strategy that diverges from its policy in the past of propping up the market with production cuts.

Saudi Arabia and Iran have negotiated coordinated action on production in the past, including in the late 1990s. Hopes for such an agreement have dimmed, analysts said.

“Before the latest development, there was a possibility that OPEC could reach an agreement or a coordinated action,” said Mohammad al-Sabban, a former senior adviser to the Saudi oil minister. Now, “Iran will refuse to coordinate on a cut and Saudi Arabia won’t compromise.”

The mood among some in Tehran was equally pessimistic over the potential damage inflicted to OPEC.

“Already, Saudi Arabia was not cooperating with Iran in the oil market,” said Roozbeh Aliabadi, managing partner at political risk and business consultancy Global Growth Advisors, which helps businesses interested in working in Iran. “Now I expect the Saudi attitude in OPEC will turn from noncooperation into confrontation with Iran.”

Ole Hansen, head of commodities strategy at Saxo Bank, said in a note Monday that Saudi Arabia, the world’s largest oil exporter, would be negotiating with a “more equal partner” as Iran ramps up production.

“This may be difficult to achieve given the current turmoil,” Mr. Hansen said.

The tumble in oil prices has put intense pressure on the oil-dependent economies of OPEC members. Last week, Riyadh disclosed a record deficit of nearly 367 billion Saudi riyals (around $98 billion) in 2015, or about 15% of gross domestic product. The kingdom expects to run a deficit of 326.2 billion riyals in 2016, as projected revenue falls to 513.8 billion riyals. The kingdom’s national oil company, Saudi Aramco, is also slashing spending.

In Iran, oil officials are facing the prospect of boosting production just as prices are tanking even more. Last week, Mr. Zanganeh said Iran’s budget for the next fiscal year starting in March assumes an average oil price of $40 per barrel, compared with $72 a barrel in 2015.

The price of Iran’s heavy crude oil had plunged below $30 per barrel in mid-December trade, according to Iran’s oil ministry.

>>> Byron Wien 2016 predictions

Byron Wien predicts
  • U.S. equity markets will have a down year in 2016,
  • Sees Fed raising interest rates by 25 basis points only once during the year.
  • Byron Wien Predicts Clinton in Presidency, Democrats Take Senate
  • Sees investors reducing holdings of U.S. stocks due to weak American economy, soft equity markets
  • Sees China growth dropping below 5%, global growth falling to 2%
  • Sees oil prices remaining in $30 range
  • Predicts sharp downturn for high-end residental real estate in New York and London

>>> Fed's Williams (moderate, FOMC non-voter in 2016): China is undergoing a sig

Fed's Williams (moderate, FOMC non-voter in 2016): China is undergoing a significant pivot, not terribly worried about China given good consumer spending data - CNBC interview 
- Chinese stock market has a fairly small impact on overseas stock markets, given its small size.
- Chinese slowdown is not a systemic risk to the US economy
- US economy is in very good shape, relative to other countries, that should continue in 2016
- Europe and Asia are struggling economically more than the US, but policy responses will help them get back on track
- Over the medium term, Fed needs to focus on its dual mandate
- Net exports a big drag on US economy, will still need significant accomodation over next few years
- Three to five Fed rate hikes in 2016 would make sense
- Personally, I see unemployment dropping below 5% in 2016, inflation moving back toward 2%
- Strong USD has held down inflation

FT : Baxalta agrees $1.6bn deal for Symphogen cancer drug tie-up


Baxalta, the US biotech company facing renewed takeover interest from Shire, has agreed a deal worth up to $1.6bn to develop cancer drugs with a Danish company called Symphogen.
The partnership, announced on Monday, signalled Baxalta’s determination to press ahead with its own plans even as talks continue over a potential sale to UK-listed Shire for more than $30bn.

The deal could further increase the appeal of Baxalta to Shire, whose chief executive, Flemming Ornskov, has expressed a desire to expand into cancer drugs. However, adding further potential assets to Baxalta’s pipeline could complicate negotiations over a sale to Shire.
Baxalta resisted a $30bn all-share offer from Shire in August, but people close to the situation say talks have since made progress towards a higher bid that would be sweetened with a cash component.
In the tie-up with Symphogen, Baxalta has agreed to make an upfront payment of $175m to the Danish company in exchange for exclusive rights to six cancer “immunotherapies” that it has in pre-clinical development. Further sums would be payable subject to progress through clinical studies, up to a maximum of $1.6bn.
Illinois-based Baxalta — spun-off last year from US medical group Baxter — is best known for its treatments for haemophilia, the rare blood disorder, but it also has a presence in immunology and oncology.
The Symphogen deal is focused on a burgeoning area of cancer research called immuno-oncology, which involves boosting the ability of the body’s immune system to hunt and destroy cancer cells.
David Meek, head of oncology for Baxalta’s cancer business, said the alliance was “just the beginning of our focus in building world-class capabilities in immuno-oncology”.
Few details were given about the six drug candidates to be worked on with Symphogen other than that they would be “checkpoint therapies”, which aim to clear a path for disease-fighting white blood cells to attack tumours.
Under the terms of the deal, Symphogen will be responsible for early clinical development, due to start in 2017, at its own expense; Baxalta will then have an exclusive option to take the therapies through later-stage trials to market.
Kirsten Drejer, Symphogen chief executive, said: “We know how to clone the antibodies and take them through pre-clinical studies; Baxalta has the machinery for late-stage development and commercialisation.”
The partnership will provide privately owned Symphogen with funds to push forward its own development pipeline, including a treatment for colorectal cancer in mid-stage trials. Its biggest shareholder is the investment arm of Novo, the holding company that controls Novo Nordisk, the Danish drugmaker.
Symphogen is focused on antibody therapies that use genetically engineered proteins to target diseased cells and tissue. It is pursuing similar technology to Genmab, another, more mature Danish drug developer which has emerged as one of Europe’s most promising biotech companies.