Oil Likely to Rise as the Middle East Simmers

oil prices set to rise

Are we on the cusp of yet another rise in geo-political risk in the Middle East?

It looks that way, and the implications for global markets could be massive.

There are some major issues going down in Saudi Arabia right now. About a week ago, Crown Prince Mohammad bin Salman ordered the arrest of some of the most powerful ministers and princes in the country.

Mohammad bin Salman, or ‘MBS’ as he is known, is the son of the 83-year-old Saudi King Salman. He is the architect behind the Vision 2030 project, a hugely ambitious plan to develop the Saudi economy and move it away from its dependency on oil.

Part of that plan is to sell 5% of the state owned oil company, Saudi Aramco, for around US$100 billion.

Just a few weeks ago, the Ritz Carlton in Riyadh hosted some of the world’s top bankers and finance types, as MBS sold his vision for a modern Saudi Arabia.

Soon after they left, the Ritz Carlton ‘hosted’ hundreds of Saudi elite, arrested on corruption charges by MBS, who many expect to soon be the King.

Saudi Arabia has an extremely complex ruling system. I don’t pretend to understand it. But it’s potentially in a very fragile state right now.

The arrests that MBS recently ordered go all the way to the top of the business elite and the royal family itself. Alwaleed bin Talal is perhaps the biggest scalp. He is the grandson of Ibn Saud, the modern founder of Saudi Arabia, and perhaps the richest man in the Kingdom.

There’s no doubt there will be backlash.

MBS is trying to send a message that if the Saudi state wants to modernise and move away from oil dependency, it must move away from endemic corruption, and away from the perception that corruption exists on a grand scale.

The country is a relatively young one. MBS is therefore betting on social support for his reforms and crackdown on the elites who benefit most from the Saudi social structure.

He’s also trying to break the hold of the hardcore religious clerics. You can’t develop an industrial economy with the strict religious culture that Saudi Arabia has now. MBS’ first move was to allow women to drive. The fact that they couldn’t do so already may seem insane from our perspective, but allowing it is a big blow to the Wahhabi clerics’ power base.

That’s all happening inside the Kingdom. But there’s a lot going on around it, too. Just after the news of the arrests, Iranian backed Houthi rebels in Yemen fired a ballistic missile at Riyadh.

And just prior to that, the Lebanese Prime Minister and Saudi ally Saad Hariri announced his resignation in Riyadh, and on Saudi Television!

What’s Lebanon got to do with it? 

Well, Hariri was a part of a national unity government that includes the Iranian-backed Hizbollah. Are the Saudis now trying to destabilise Lebanon in order to fight a proxy war with Iran?

That’s the big issue here. Iran and Saudi Arabia are regional powers. They are enemies because the Saudis are Sunni Muslims, while the Iranians are Shia. Religion strikes again…

The whole Syrian civil war was a proxy war between these two powers. The US backed the Saudis and the ‘rebels’ while the Iranians and the Russians backed the ruling Assad-led Syrian government.

Qatar has also fallen out with the Saudis. The Kingdom is losing its longstanding regional influence, while Iran grows in stature.

At the same time, the soon-to-be-King is making waves internally by trying to bring about a cultural revolution.

When you’re swimming in oil, you can afford the buy support via a generous welfare state, and turn a blind eye to all sorts of corruption. But if you’re trying to move away from oil dependency, the status quo has to change.

While it will change, it will take time and won’t go at all smoothly. This is why you’re going to see a rise in Middle Eastern instability — again.

And where will you see it most from an investment perspective? Where you always do; in oil and to a lesser extent, gold.

You can see in the chart below how oil has rallied significantly from the June lows. Much of the more recent price rise is due to the tumultuous events I relayed above.

Crude Oil Brent NYMEX 13-11-17

Source: Optuma

[Click to open new window]

Oil clearly looks like it needs to pull back in the coming weeks. But the recent breakout to multi-year highs and the likelihood of increasing geopolitical tensions in the Middle East bode well for further gains in 2018.

Regards,

Greg Canavan,
Editor, Crisis & Opportunity

Greg Canavan

Greg Canavan

Greg Canavan is a Feature Editor at Money Morning and Head of Research at Port Phillip Publishing.

He likes to promote a seemingly weird investment philosophy based on the old adage that ‘ignorance is bliss’.

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