Investors will certainly keep developments in Saudi Arabia in mind when they read the oil market reports by OPEC on next Monday and the International Energy Agency on Tuesday.
The Crown Prince and de-facto ruler of the country, Mohammed bin Salman, (MBS) launched an anti-corruption drive and immediately arrested a swathe of Saudi Princes including any possible rivals to his father’s throne, up to thirty former and acting ministers and the heads of all three major TV stations. He now controls all three of the different armies in Saudi Arabia, as well as the main economics assets and now, the media. Meanwhile, the rebels in Yemen – fighting an ongoing war against Saudi Arabia managed to launch a ballistic missile at Riyadh airport while a helicopter carrying another Saudi Prince crashed near the southern border killing all aboard. Finally, Prime Minister Hariri of Lebanon suddenly resigned after only a year – live from Saudi Arabia and on Saudi Arabian television – as rhetoric against Iranian interference seemed to go up significantly. Thus, Mark Tinker, Head of AXA IM Framlington Equities Asia, thinks that “as the war in Syria against ISIS reaches its final stages, we may find that peace remains elusive in the region as attention switches to Lebanon and Iran.”
Furthermore, he reminds that oil meanwhile looks to have broken out to the upside, which is very much a function of Brent Crude rather than West Texas Intermediate. The two often trade with a gap reflecting differing supply and demand characteristics and refinery set-ups, but if we normalise the two oil prices from January this year we can see that Brent is up 12.99% while West Texas is up 6.76%. Tinker explains:
The gap is not entirely down to the recent Saudi moves, it started to open at the end of August thanks to the disruption from Hurricane Harvey, which took out gulf coast refining capacity and left US crude stocks higher, while another factor is almost certainly the debt default issues in Venezuela, which are already leading to lower production, something that could escalate rapidly if there were asset seizures.
There is almost certainly some speculation involved in Brent futures as well – the market talk about the Organization of Petroleum Exporting Countries’ (OPEC) cuts and higher prices is reminiscent of similar wishful thinking this time a year ago – suggesting that unless the fundamentals really do follow through the rally could unwind quickly. Should the spread persist then there are other likely consequences. US east coast refiners may once again find it worthwhile putting oil on railcars as they did back in 2014/15, while US oil exports going direct to places like China would likely pick up further along with recent announcements on US liquefied natural gas (LNG). The expert of AXA IM in Asia says in the end that:
This is all something I am sure will be mentioned in Beijing next week as will a proposal for Sinopec to help build a 700 mile pipeline from the Permian Basin to the Gulf coast and to expand its oil storage facility on St Croix in the US Virgin Islands. As the Bloomberg report points out, the Sinopec deal alone could reduce the US trade deficit by $10bn.