My muse is the Kingdom tonight – not the kingdom of heaven but the Kingdom of Saudi Arabia. Prince Abdulaziz reinforced Saudi Arabia’s role as the swing producer of OPEC+ at Vienna with a voluntary 1MBD output cut and his energy diplomacy gave UAE a 200,000 barrel a day quota increase. The impact on oil prices has not been dramatic as Brent is now $77 and WTI trades at $72.60. The fact that the kingdom chose to go it alone with its 1 MBD cut is bullish because the oil bears know that the cuts will happen in July, just as inventory stockpiles run low.
It is not prudent to short Brent/WTI with impunity and I would advise the paper oil gunslingers of Wall Street to watch out. Yet the fact that the Saudis have led 3 major output cuts since last October demonstrate that all is not hunky dory for diesel demand in the Middle Kingdom, an EU where Germany is in recession and Das Auto industrial wirtschaftswunder has gone burst and a 3rd world in deep economic distress as a sovereign debt crisis converges with Fed tight money and a strong dollar.
Bill Clinton’s consigliere James Carvel defined the term “it’s the economy, stupid” to define American politics in the 1990’s but the same sentiment can be used for Uncle Sam’s diplomacy with its most important Arab ally, as Tony Blinken lands in Riyadh for a state visit.
The Biden White House is turning cartwheels to end the big chill in its relationship with MBS and the House of Saud. Money talks everywhere but money screams at a decibel count heard all over the planet when America goes deal hunting for Saudi petrodollars in the desert palaces of Riyadh. So unlike last October, Blinken will not diss the kingdom for imposing higher gasoline prices on the American consumers since Biden does not face any imminent mid-term election. In fact, Blinken is now in deal heat as Boeing is set to sell 150 of its 737 Max planes to Riyadh Air and there is stock of $265 billion in defense/aviation deals. Since the kingdom’s budget breakeven price is $85 Brent, its output strategy in Vienna was obviously designed to boost crude oil prices to at least this level.
I doubt if Blinken will get the kingdom to sign a peace treaty with Israel as long as King Salman is alive and Gaza is in hot war mode. The Chinese brokered diplomatic rapprochement with Iran has also upset Uncle Sam but Biden will not allow the Saudis to start a domestic Uranium enrichment program if he can help it. Blinken will also focus on the wars in Ukraine, Sudan, Libya and Yemen.
Investment implications? Saudi Arabia is a beneficiary of higher oil prices but the Tadawul index is way too expensive at 18X earnings and 45% of the Saudi ETF traded in New York is financials and not oil. Saudi Aramco is 95% owned by the government. I think Exxon Mobil is a better proxy for higher oil prices at 8 times earnings and zero state ownership though what is good for Exxon is usually good for Uncle Sam in the Middle East, hallelujah!
Also published on Medium.
