Saudi Arabia

The arrival of cinema (after a 35-year ban), comedy shows, women driving. What the hell is happening? At this rate, within a few months Saudi woman will be tottering around in lululemon and enraging the clerics via Instagram in their yoga pants. I could think of worse things.

Why all these changes?

Good question! Let’s first take a look at what Mohammed Bin Salman (MBS) has done.

I already wrote about MBS back in November when he gave all the royals a nice holiday in the Ritz.

Clearly he’s charting a new course, and amongst the Saudi population he’s very popular. And why not? He’s basically Robin Hood without the green tights, who just donned a white sheet.

Remember the Arab Spring?

That was waaaay back in 2012. MBS was just still in his 20’s but being a sharp guy I’m pretty sure he was watching.

It wasn’t therefore lost on him how mad a population can get when they see lavish extravagance around them… and they’re not party to it. And so stripping untold wealth from the royals and redistributing a percentage of this to the people isn’t the dumbest idea ever. And for that he’s a modern-day hero.

As to all those ~~powerful and wealthy~~ angry royals… Well, they’re no doubt pretty shocked.

I mean, what he’s done is even less appropriate than farting at a Royal Ascot charity dinner. It was certainly more unexpected. I’m sure if they could, they’d fill his trousers with some of that oil that’s made them all so stinking rich and set him alight. But that’s unlikely to happen, at least for now. Why?

And Trump can champion all these freedoms MBS is allowing and take credit for them. Now, being such a bashful, humble guy I’m sure he won’t, but you know he could if he wanted to.

As for MBS, he’s no dolt. I mean, for starters a thuggish dolt of a dictator would simply have chopped off the heads of all the royals and stolen all their money. Not MBS. He’s cunningly served much the same dish by coating it in a delicious looking mayonnaise called “cracking down on corruption” and the world’s eating it up.

He realises that OPEC is finished and no matter what they all agree to do it’s just smoke and mirrors at this point as they’re all cheating more than a group of married investment bankers in Vegas for the weekend. So what’s he to do?

Develop the petrochemical complex, build out refining capacity like they’re doing at the Jazan refinery and terminal project, which on completion will sport a processing capacity of more than 400,000 barrels of the black stuff per day, providing fuels for domestic and international customers. And diversify Saudi’s economy from oil.

Alternative energy? Sure!

Tourism? Yes, sir!

Now, you might look at me with cross eyes and say, “Chris, put down the drugs! Who on earth would go on holiday to Saudi frickin’ Arabia?” And you’d be right, which is why MBS is building, amongst other things, NEOM, a $500 billion mega city.

In his own words:

We’re building a new generation of cities. NEOM will be powered by clean energy, and will have no room for anything traditional.

Take a look.

https://www.washingtonpost.com/video/c/embed/54d97738-b961-11e7-9b93-b97043e57a22

Ha! And you thought I was kidding about lululemon!

Here’s what I said in that article back in November:

It looks to me like MBS sees this for the expiring option contract that it is. My best guess is that he realises that if they wait too long, by the time the welfare money has run out, they’ll all be overthrown. The old guard probably don’t want to hear that, but it is the truth. And because they don’t want to hear it, you need to get rid of them.

Now only 3 months on that certainly looks like it was a pretty good guess. Lucky me!

IPO?

All talk now seems to be around this Saudi Aramco IPO.

You know what I think?

I don’t think it’s going to happen. At least not as many think.

Here’s a question that’s been bugging me and we should all ask ourselves. We’re ostensibly leading up to an IPO of what is the worlds largest company. And yet, nobody knows the numbers. Seriously!

This is not even like Tesla whose numbers are just financial spaghetti. These guys have not opened their books so we just don’t really know. Hands up who wants to invest in a company where we don’t know what the hell we’re buying… in a country renowned for chopping off people’s heads?

Yeah, and while you’re thinking about that, think about this. Everything MBS has done has been pretty methodical and clearly calculated. This is a sharp guy. You may not like him but he’s clearly not an idiot. Would he risk a failed IPO at a time when he’s been making some of the most polarising decisions in the history of the Kingdom?

Yeah, I didn’t think so either. I may be proven wrong but what I think is more likely is a listing of certain “assets” — maybe some port facilities, a refinery or two. JVs such as the Aramco-Sinopec Yanbu refinery JV. We’ll see that sort of stuff but not a wholesale listing of Aramco because let’s face it: That’d be like lifting you kilt and what the whole world will be looking to see is how big is it really? I don’t see any signs MBS is willing to reveal this.

Implications

Markets are funny creatures. Everything everywhere feeds in and out of the animal revealing which way it may be headed. So in that light I present to you high yield energy:

Back to 2014 highs. Remember 2014? Probably not. Well, let me remind you. Here it is:

That’s quite some divergence. Certainly the high yield market shows us that speculators are betting aggressively right now. That’s a worry in itself because the thing with speculators is they’re like husbands arguing with their wives — let’s face it, we’re very rarely right.

Long or short?

Well, I can’t give away how we’re positioned as that’d be pretty unfair to subscribers, but there’s just no asymmetry in oil itself and as for the high yield energy market. Put a gun to my head and I’d be short and since there’s no gun at my head, I’ll just not play in that sandpit.

What do you think?

What’s the best way to invest in oil (long or short) for the next 5 years?

Let me know in the comments section.

– Chris

“Cycles of shortage and surplus characterize the entire history of oil.” — Daniel Yergin

Topics