Soldiers of the Ukrainian army on the front line during the Joint Forces Operation in Donbass area, Luhansk region, Ukraine, on June 2018.
NurPhoto | NurPhoto | Getty Images
A high-profile prisoner exchange between Russia and Ukraine is being seen as a boost to the possible resumption of peace talks, but some experts are tempering those hopes.
Ambassador Kurt Volker, the U.S. special representative for Ukraine negotiations, told CNBC Wednesday that “there is a long way to go before there would be any normalization between the two countries.”
“Russia’s invasion, occupation, and claimed annexation of Crimea will never be accepted by Ukraine,” Volker, who is also the executive director of the McCain Institute for International Leadership, told CNBC. “That said, it is possible to make progress toward peace in Eastern Ukraine.”
“This prisoner exchange is a good step, that could pave the way for further exchanges, a more durable cease-fire, withdrawal of heavy weapons and — ideally — a decision by Russia to proceed with implementing the Minsk agreements. If so, it would tremendously improve the lives of the local population,” he added.
On Saturday, a possible thawing of frosty relations between the two neighbors came about after Russia and Ukraine exchanged a total of 70 prisoners, including Ukrainian sailors that were detained in November 2018 following a skirmish in the Kerch Strait.
The incident in the strait was just one of a number of incidents reflecting heightened tensions between the countries since 2014, following Russia’s annexation of Crimea and its role in a pro-Russian uprising in the Donbass region in the east of the country.
The uprising prompted Russian-backed separatists within the Donbass to proclaim two “people’s republics” in Donetsk and Luhansk, exacerbating the destabilization of (and tensions with) Ukraine. It has also led to Russia becoming something of a pariah in the international community and it is still subject to sanctions for its actions.
The conflict in the Donbass region is now in its fifth year, although it has been characterized more by regular skirmishes than outright war. Nonetheless, the human cost has been high. Over 13,000 people (including civilians and combatants from both sides) have died since 2014, according to the United Nations, and hostilities have affected 3.9 million civilians living in the region.
Efforts by France and Germany in 2015 to broker a cease-fire and peace deal, known as the Minsk agreements, were widely seen to have failed with both Russia and Ukraine accusing each other of failing to meet the conditions of the deal.
Against a backdrop of bitter relations, a lot of focus has been on how the new Ukrainian President Volodymyr Zelensky, a comedian and TV star by trade, would handle Russia after he campaigned on a pledge to end the conflict in the Donbass region. During his inauguration, Zelensky said that the government’s “first task is to achieve a cease-fire in Donbass.”
‘Normalization’ of Ukraine-Russia relations?
Zelensky said Saturday that all steps must be taken “to finish this horrible war,” Reuters reported, while Russian President Vladimir Putin said the swap would be “a good step towards the normalization of relations.”
Even President Donald Trump got enthusiastic, tweeting his approval and his hope for peace.
Experts are cynical, however. Otilia Dhand, senior vice president at Teneo Intelligence, is also not convinced that the exchange means conflict resolution, noting that there are major barriers to peace in place.
“First, this was just another (though high-profile) among several exchanges of prisoners between Ukraine and Russia under the 2015 Minsk cease-fire agreement,” she said in a note Tuesday.
“Second, the political conditions of the cease-fire agreement require constitutional reform in Ukraine prior to the restoration of Kyiv’s territorial control. Separatists would likely demand decision-making powers in foreign policy to prevent any possibility of Ukraine’s westward economic and security integration, which remains unacceptable for Kyiv.”
Nonetheless, Dhand noted that the recent increase in bilateral activity suggests that some form of talks over the Donbas conflict will likely take place soon, with both sides having vested interests in a resolution.
“Ukraine’s new president, Volodymyr Zelensky, seeks a substantial political victory to foster his position in the political system … Russia seeks a normalization of relations with the EU and the U.S., the easing of sanctions and the return to the global political stage,” she said.
Trump says he’s in no rush to respond to the attacks on Saudi oil facilities
President Donald Trump said Monday he’s in no rush to respond to a coordinated attack that hit Saudi Arabia’s oil industry over the weekend.
The largest oil processing facility at Abqaiq and the nearby oil field was attacked on Saturday, knocking out 5.7 million barrels of daily crude production or more than 50% of the kingdom’s oil output. The disruption sent Brent oil prices soaring, posting its biggest jump on record.
“It’s certainly looking that way at this point,” Trump responded to a question on whether Iran was responsible for the attacks. “I don’t want war with anybody but we are prepared more than anybody … We have a lot of options but we are not looking at options right now.”
“That was a very large attack and it could be met with an attack many, many times larger very easily by our country, but we are going to find out who definitively did it first,” he added.
Iranian president Hassan Rouhani said Monday the attacks on Aramco were a “reciprocal response” to the aggression against Yemen.
A Saudi-led military coalition said the attack was carried out by “Iranian weapons” and did not originate from Yemen.
The most recent comment from Trump contrasts his attitude expressed on Sunday when he said in a tweet the U.S. is “locked and loaded” after the attacks on Saudi’s oil supply.
Trump also said he was authorizing the release of oil from the Strategic Petroleum Reserve to keep the markets “well-supplied.”
Oil prices could go higher if there’s a military escalation
An employee walks past crude oil storage tanks at the Juaymah Tank Farm in Saudi Aramco’s Ras Tanura oil refinery and oil terminal in Ras Tanura, Saudi Arabia, on Monday, Oct. 1, 2018.
Simon Dawson | Bloomberg | Getty Images
The growth of the U.S. as both oil producer and exporter is helping cap a spike in crude prices following attacks on Saudi Arabian oil facilities, but the price could go sharply higher, depending on the duration of the disruption and whether it escalates into a military conflict.
The weekend attack on the Saudi Aramco’s Abqaiq processing facility and another plant knocked 5.7 million barrels of Saudi production off line and underscores a new realization of vulnerability in world oil production. That is 5% of global oil output and about half of Saudi’s production, but Saudi Arabia has sufficient supplies to maintain its current export level for about a month.
Oil prices initially spiked nearly 20% in trading Sunday evening but were up just about 14.5% in U.S. trading Monday, the biggest one-day move since Feburary, 2016. Brent was trading at $68.45 per barrel in late trading.
“What the market is pricing is geopolitical risk premium and tail risk. Something like this has never happened before. There have been attempts but those were foiled,” said Amarpreet Singh, Barclays energy analyst. “Something like this to Saudi supply has absolutely never happened, even during the Gulf War.”
Houthi rebels, aligned with Iran, claimed responsibility for the attack, but Secretary of State Mike Pompeo said Iran was responsible.
Saudi Arabia’s foreign ministry said an investigation into the incident shows Iranian weapons were used in the attack. President Donald Trump presided over a national security meeting at the White House Monday morning on the topic of Iran, NBC News reported from sources.
Trump told reporters Monday afternoon that he was in no rush to respond to the attacks on Saudi oil facilities.
“The more we have coming from Washington and Riyadh implicating the Iranians in this attack, there may be more pressure for Washington to back words with action,” said Helima Croft, head of global commodities research. “This is one of the most strategically important energy facilities in the world. If you do nothing, are you essentially green lighting more attacks. At what point, do you need to show some deterrence?”
Iranian President Hassan Rouhani said, at a press briefing Monday, that the attack was self-defense by Houthis and a retaliatory response for Saudi attacks on Yemen.
The attack on Aramco facilities was highly sophisticated and targeted the critical processing plants that help reduce hyrdrogen sulfur in crude. There have been numerous other attacks on Saudi Arabia, as well as on oil tankers, but none has done such extensive damage.
Analysts at Goldman Sachs said a lengthier outage could result in a sharp jump in crude prices. For instance, if the current level of production remained down for more than six weeks, there could be a quick rally in Brent to $75 per barrel, they said in a note. Brent is the international bench mark and traditionally has been more sensitive to events in the middle east.
Singh said Brent could reach $75 if the outage is extended, and in about three weeks the Saudi oil supplies would begin to run low. “If it takes that long you’ll really start seeing another leg up,” he said.
The Barclays analyst said the market has been responding to the worries of slowing economic activity from the trade war, and he said the market was already heading towards a deficit.
“What’s incremental [for oil prices] is this attack and what’s unknown is how long it’s going to take to restore production. The other unknown is what kind of escalation is going to happen here,” he said.
But oil could go even higher, depending on whether there are further attacks or a military response from Saudi Arabia, the U.S. or others. “If this escalates into a hot war, you’re looking on a $100 oil,” said John Kilduff of Again Capital.
He noted that Saudi Arabia is calling on the United Nations to investigate the attacks.
“You don’t get the sense there’s a rush to war, as spectacular as this attack was,” said Kilduff.
For now, both U.S. West Texas Intermediate and Brent futures are trading at levels last seen in May, and have broken slightly above a range they were trapped in all summer. WTI futures settled up 14.8% at $62.90 per barrel, its best day since December, 2008.
Croft said Brent could get back to this year’s high of $75.60, and in the event of an escalation, it could reach its October, 2018 high of $86.74 per barrel. “$85 is the new $100,” said Croft. “What’s changed is you now have this resource in the U.S.”
A conflict in the Middle East could have driven oil to $200 a barrel five years ago. “If you add a war to this, maybe you would have $100,” she said.
The pressure is also on Saudi Arabia Crown Prince Mohammed bin Salman to take action. The prince, known as MBS, is in charge of Saudi Arabia’s military and leads the war in Yemen. He also is driving the kingdom’s diversification effort away from oil. The anticipated initial public offering of Aramco is a big part of that effort though some analysts said it may now be delayed.
“If they don’t do anything, they’re going to look really weak,” said Kilduff.
Croft, in an earlier note, said MBS has shown more willingness to confront the Iranians and their proxies than previous Saudi leaders.
“At a minimum, we would expect to see stepped-up Saudi bombings on Houthi targets in Yemen, but one cannot rule out a more direct retaliation on Iran if the attacks continue at the current pace,” she noted.
The U.S. said it would consider tapping its strategic oil reserves to make up for lost supply, but U.S. Energy Secretary Rick Perry said it would be premature to do so at this point.
Analysts have already been expecting the U.S. to add more export capacity. Pipelines to take crude from the Permian basin to the Gulf Coast have just come on line, and more are to follow.
According to Citigroup, the new pipelines could help grow U.S. oil exports from the current 3 million barrels a day by 1 million barrels more by year-end and another million barrels next year. Exports have already grown by an average 970,00 barrels a day this year over last year, according to Citigroup.
The U.S. is currently importing very little Saudi oil, and imports now are about 500,000 barrels a day.
“There’s actually a silver lining, if you will, to this story in the sense that had this happened five year ago, it could have absolutely brought the global economy to its knees. Today, we’re concerned about it. We need to address it, but it’s not anywhere near as devastating as it would have been five years ago,” Energy Secretary Rick Perry told CNBC.
According to Energy Department weekly data, the U.S. produced about 12.4 million barrels a day, and exported about 3.3 million barrels a day earlier this month. The U.S. was a net importer of about 3.4 million barrels of crude.
The U.S. in the past year has become the world’s largest oil producer, ahead of both Saudi Arabia and Russia. OPEC and Russia have had an agreement to reduce production in an attempt to prop up world oil prices, which have been soft on worries about weakening demand growth.
FAA chief to test out changes to Boeing 737 Max software in simulator
Stephen Dickson, administrator of Federal Aviation Administration (FAA) nominee, speaks during a Senate Commerce, Science & Transportation confirmation hearing in Washington D.C., May 15, 2019.
Stefani Reynolds | Bloomberg | Getty Images
The 737 Max has been grounded since mid-March after two fatal crashes within five months of one another. Investigators implicated a flight-control software that repeatedly pushed the nose of the planes down in both air disasters.
Stephen Dickson, a pilot and former Delta Air Lines executive, who was sworn in as FAA administrator last month, told CNBC he plans to travel to Seattle this week to test out the changes. Boeing’s 737 Max planes are produced in the Seattle area.
“I’m anxious to get out to Seattle later this week and look into this myself and see where we are with the certification process,” Dickson said. “I can I guarantee you that the airplane will not be flying again until I’m satisfied that it’s the safest thing out there.”
Dickson said the agency does not have a firm timeline for allowing the planes to fly again.
This is breaking news. Check back for updates.
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