Saudi Conflict Sends Investors Back To Oil Stocks

By far, the most important news to the global energy markets this week were the arrests in Saudi Arabia.

Others in the media will talk of this in political terms, but I could care less about Saudi Arabian politics. I only care about how it’s going to affect oil prices and our oil stocks. And it’s going to be great for both.

Mohammed bin Salman (now referred to by the quick sobriquet MbS), is the 32-year old son of the 81-year old (relatively) new Saudi king. The centerpiece of the new father and son team is Vision 2030, a re-imagining of Saudi Arabia in the 21st century. Besides less restrictive religious influence, the plan envisions educational opportunities and job mobility for the young. The one key component to financing all of this, and modernizing Saudi Arabia in economic as well as social terms is a necessary decoupling from oil. Oil represents the old political structure and the old religious and social structure. Saudi Arabia will always rely upon oil revenues, but must find other economic pillars to complement oil in order to have any hope of modernizing.

The old order in Saudi Arabia is represented by the few dozen insanely wealthy oil sheikhs that the young MbS put under arrest last weekend. To the youth of Saudi Arabia, young MbS is a rock star, taking full control of the state while destroying any remaining resistance to full implementation of Vision 2030.

Consolidation of power is all about insuring the success of Vision 2030. Vision 2030 is all about the success of the coming Saudi Aramco IPO. And the success of the Saudi Aramco IPO is all about how high the Saudi Prince can make the price of oil go in 2018.

The bottom line of the weekend arrests in the Kingdom? MbS is very clearly on a mission to make oil prices go much higher.

To further illustrate the focus of Saudi Arabia on oil prices, we had a report of a missile attack from Yemen towards the Saudi airport in Riyadh. The Saudis almost immediately pointed a finger at Iran and called it an “act of war”. It is common knowledge that Houthi rebels in Yemen are supported by Iran and the nasty dialogue between the two nations has been escalating for months – at least where Yemen is concerned. But the one place you won't see that animosity carry over is inside OPEC.

Now that oil prices are seeing the benefits of the Saudi-directed OPEC production cuts, there is no chance that any geopolitical skirmishes are going to come between any of them and a healthier profit. Petrodollars remain a strong balm on religious differences.

The one negative we might find this week is in the conviction from oil analysts and oil traders on the trajectory of oil prices. Eight weeks ago, I was virtually alone in calling the end of the oil bust and the coming boom of prices above $60. Yesterday, both Paribas and Morgan Stanley raised their oil price targets for 2018 – by $5 and $8 dollars a barrel respectively. Similarly, long positions from hedge funds are again reaching the kind of level that can normally cause a short-term correction.

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This would be the one caveat I would remind investors of in the near future. When oil traders get this convinced of the direction of oil prices, the markets have done a very good job of punishing their convictions, at least in the short run.

Other than that, green lights for investing aggressively in oil stocks continue to emerge almost daily.