You can count me in the camp that thinks crude is going to have a hard time staging a sustainable rally no matter what happens geopolitically, so let’s just get that out there up front.
There’s an absurd “up the down escalator” dynamic at play with U.S. production and as long as capital markets remain wide open thanks to the central bank-inspired hunt for yield, well then it’s hard to see a scenario where rising prices aren’t met with rising production, in a self-defeating loop.
Meanwhile, the production cuts have helped, but after a while the whole “a sustained market rebalancing is just around the corner” meme gets tiresome, as does the headline hockey about who’s in and who’s not for the next extension. Citi’s Ed Morse weighed in late last month, suggesting that “forward guidance” by the Saudis with regard to cuts has “opened up the free-rider dilemma” in the past, and we could well see that again “albeit with fewer countries able to sustainably raise output this time.”
Whatever the case, WTI is at a 2-year high and it looks to me like it’s the most overbought since 2013:
Hedge funds net-longs on Brent hit record highs last week, while WTI positions are the highest since August.
Bloomberg’s Mark Cudmore isn’t optimistic about the outlook going forward. “Crude prices jumped at the open Monday on largely irrelevant news from Saudi Arabia,” he wrote overnight, adding that “it’s got the look of a classic head fake and may mark the final push higher before a correction.”
Cudmore’s note is a decent summary of all the global events that may be relevant for oil, but make no mistake, that news out of Saudi Arabia isn’t “irrelevant” for crude. In the near-term, MbS supports the production cuts and in the long-term, Vision 2030 is about diversifying the country away from dependence on oil. By definition, nothing that happens politically in Saudi Arabia can be “irrelevant” for oil prices, and this particular political shift is more consequential than usual.
Another thing I think it’s important to understand here – and this is something I told a trader who asked for my opinion on the Saudi purge as it was unfolding on Saturday evening – MbS is a foreign policy hawk. And ousting Prince Miteb bin Abdullah from his post as chief of the National Guard consolidates the kingdom’s entire military apparatus in the hands of the Crown Prince. This is going to create a scenario wherein Iran is cementing its grip on the Shiite crescent just as MbS (an architect of the Qatar embargo) is tightening his grip in the Kingdom. That’s a pretty epic setup. Consider this excerpt from an al-Monitor article out over the summer:
In fact, in October 2016, long before the appointment of Mohammed bin Salman as Saudi Arabia’s new crown prince, Quds Force commander Qasem Soleimani told a gathering in Tehran, “Mohammed bin Salman, the second crown prince, is in a hurry and wants to set aside the first one [Crown Prince Mohammed bin Nayef], and might even kill his own father to replace him.” The Iranian major general recalled a conversation that allegedly took place between Mohammed and a Syrian official in Russia sometime in 2016, quoting the Syrian official as saying that the Saudi royal “asked about [Syrian President] Bashar al-Assad, how he is, how his family is.”
Soleimani continued, “The Syrian official then said, ‘When I saw that the atmosphere is very good, I said that Daesh [Islamic State] is a public threat against all of us, let’s join each other to fight them.’ Bin Salman replied, ‘This is nothing. We will finish Daesh and Jabhat al-Nusra in just one day, don’t worry about that. You have only one problem; your problem is having a relationship with Iran. You end that relationship and take stances against them, then all this will be over.'”
So there’s that with regard to Syria and then of course MbS is behind the long-running war with the Iran-backed Houthis in Yemen. That conflict has resulted in one of the worst humanitarian crises in the world and as we saw over the weekend, the Houthis are by no means ready to throw in the towel.
Meanwhile, Hassan Nasrallah is not amused with the resignation of Saad Hariri in Lebanon. Consider this from the New York Times:
Hezbollah’s leader, Hassan Nasrallah, called on Sunday for “patience and calm” in Lebanon, seeking to reassure a country thrown into uncertainty a day after the surprise resignation of the prime minister, Saad Hariri.
Fears for Lebanon’s stability were running high after Mr. Hariri declared his resignation in a speech televised from Riyadh, the Saudi capital, attacking Saudi Arabia’s regional rival Iran and its ally Hezbollah. The Shiite militia and political party is the strongest faction in Lebanon.
The move was widely seen as having been orchestrated by Mr. Hariri’s patrons, the Saudis, to isolate Hezbollah by collapsing Lebanon’s national unity government, which included both it and Mr. Hariri’s Sunni faction. Saudi Arabia has been taking increasingly aggressive steps to curb Iran’s growing dominance in the region.
“It was definitely a Saudi decision that was imposed on him,” said Mr. Nasrallah. “It was not his will to step down.”
Now think about that in the context of i) Donald Trump and his hardline stance on Iran, ii) Jared Kushner’s undisclosed trip to Saudi Arabia last month and iii) renewed questions about what America’s role is going to be in post-ISIS Syria and post-ISIS Iraq where the Quds engineered the seizure of Kirkuk from the Kurds last month, a move that badly embarrassed the Pentagon.
All of the ingredients are in place here for a dramatic escalation in Sunni-Shiite tensions on par with what we got after the Saudis executed Nimr al-Nimr in January of 2016.
So I guess what I would say to anyone who is looking for clues as to what impact the Saudi purge could have on crude and on global markets more generally, is that this could have serious sectarian implications at a critical juncture for global politics.
Take that with a grain of salt though, because remember: nothing that should matter ever matters anymore.