The ‘Good’ News for ASX Oil Stocks

Crude oil has been on an amazing run.

Brent crude — the international benchmark — remains above US$60 per barrel. The West Texas Intermediate price also looks strong, trading above US$55 per barrel.

Unfortunately, nothing goes up in a straight line forever. But there’s little to suggest that oil prices will reverse anytime soon. Mohammad bin Salman, Saudi Arabia’s Crown Prince, could surprise the world again.

As I talked about yesterday, Salman arrested more than 500 citizens earlier in the month. It was a surprise move. But the surprises kept coming. He ended up detaining some of the richest and most powerful royals and government officials.

The move boosted state coffers by about US$800 billion. But it might not be enough. Saudi Arabia is bleeding money. That’s why, if the country wants more cash, which it desperately needs, we could see more arrests. That would likely drive the crude price higher, benefiting the oil-producing nation in turn.

Expect the unexpected

Russian news network RT reported on Friday:

Saudi Arabia has faced a significant budget deficit since the oil price collapsed. It stood at $79 billion last year. To cut the deficit, Riyadh has tried to implement fiscal measures, including spending cuts, raising taxes, bond sales and a future public offering of part of the kingdom’s oil monopoly Saudi Aramco.

Experts have said the latest Saudi corruption purge is about Crown Prince Mohammed bin Salman consolidating power before taking the throne. Others see it as an attempt to modernize Saudi Arabia.

Corruption has nothing to do with the purge. Lower crude prices decimated both the budget and the country’s financial position. That’s why Salman put his hand in the multi-billion-dollar cookie jar.

Take a look at the foreign currency reserves on the chart below:

Saudi Arabia Oil Reserves 22-11-15

Source: Bloomberg
[Click to enlarge]

When crude prices were trading above US$100 a barrel, Saudi Arabia held US$750 billion in assets. That number has dropped by more than US$250 million over the past three years. Meanwhile, thanks to lower oil prices, the country’s budget deficit has grown to roughly 15% of GDP. To put that into perspective, the US budget deficit of US$666 billion this year will be around 3.5% of GDP.  

Saudi Arabia’s budget deficit is out of control. RT notes:

Riyadh seems to have found the way to curb the budget deficit caused by lower oil prices. As the Financial Times report, Saudi officials are offering the arrested royals a deal — pay up to 70 percent of your wealth and go free.

The Saudi government could appropriate hundreds of billions of dollars from the arrested to refill depleted state reserves, according to the media.

Hundreds of millions of dollars have been withdrawn from accounts. A former senior official handed over US$1 billion dollars’ worth of shares.

Is this just the start? We’ll have to wait and see. But Saudi Arabia has a budget crisis to deal with. And, given the evidence so far, we should expect the unexpected. More asset freezes could be on the way.

Or not…

Saudi Arabia wants the oil prices to go higher. That’s why it has started picking on Iran’s ally, Hezbollah — a militant group based in Lebanon.

The next best guess

Saudi Arabia says that Lebanese Sunni leader, Prime Minister Saad Hariri, announced his exile earlier in the month. But according to reports, Hezbollah doesn’t agree. It argues Saudi Arabia is forcefully holding Hariri, which is an act of war. Saudi Arabia denies the allegations, claiming that Hariri is free to leave at any time.

Saudi Arabia’s government is also pivoting towards Israel to confront Iran.

I believe a major military showdown will eventually take place between Saudi Arabia and Iran. RT explained what it could look like on Tuesday (my emphasis added):

When it comes to large-scale ground battles, Iran has hardware numbers more or less on its side. It lags behind Saudi Arabia in terms of infantry fighting vehicles, but beats it in strength of tank units and vastly outnumbers in all kinds of artillery. But again, Iran’s ability to capitalize on this advantage will depend on whether it can defend the sky.

Of course, if Iran and Saudi Arabia do come to blows, it would take a heavy toll on both countries and the rest of the world. Unlike the sporadic launches from Yemen, Iran’s ballistic missiles are more than capable of overwhelming Saudi defenses. 

And if the two nations do clash, other players are unlikely to just stand by. The usual proxy forces will be spun to action. A real mess with little gain can be predicted, which is why, hopefully, it will not happen.

The bottom line: Pay attention to what’s happening in the Middle East. If Saudi Arabia makes another unpredictable move — one which could happen at any time — it could be good news for ASX-listed crude and oil stocks.


Jason Stevenson,
Editor, Resource Speculator

Jason Stevenson is Markets & Money’s resource analyst. He shares over a decade’s worth of investing and trading experience across resource stocks and commodity futures and options. He originally studied accounting and finance at Curtin University, where he was awarded a first-class honours degree. His professional background stems across high-net-worth, top tier accounting (corporate finance, tax and auditing), and sell-side equities research. Before joining the team at Markets and Money, Jason worked at boutique firms which advised fund managers and high-net-worth clients on where to invest. Whether it’s gold, crude oil, copper or an obscure metal like vanadium, you can rely on an in-depth analysis in Markets and Money. Jason also brings you extensive macro, political and geopolitical analysis from around the world. He leaves no stone unturned when it comes to telling the truth. Jason is also the lead analyst of Gold Stock Trader, a premium service for investors serious about precious metal stocks. Websites and financial e-letters Jason writes for:

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