The Man Behind The Oil Rally

The OPEC meeting is over and the cartel has extended production cuts throughout 2018. The decision is obviously crucial to supporting oil prices, but perhaps an even bigger story is the relentless strategy from the young Saudi Prince, Mohammed bin Salman, being played out both inside OPEC and in his own country. And oil is the key to it all.

Last Sunday premiered the newly formed Islamic anti-terrorism coalition, putting together leaders from Sunni Arab nations to denounce and combat fundamentalist terrorism throughout the Middle East and the world. It was another bold initiative towards the West of the young and energetic Crown Prince of Saudi Arabia, coming on the heels of other bold moves that have looked to consolidate political and religious power in the Kingdom.

Together, all of these initiatives couldn’t be more transparent. They represent a movement of the most economically powerful nation in OPEC towards social, cultural and economic change, the realization of the Saudi “Vision 2030”. It is a top-down Arab Spring movement that likely has a better chance of success than the populist movements that resulted in more chaos than change in 2010.

However, the ultimate success for Vision 2030 will rely upon achieving the main economic goal of this revolution – the divestiture of Saudi Arabia from the singularity of oil revenues. Because we know that ultimately money – and lots of it – will be needed to drive the engines for change, we get a far better picture of just how important these latest production extensions agreed to in Vienna were for the young Prince.

And here we’re brought back to the upcoming IPO of Saudi Aramco, still on tap for 2018.

Even the planned 5 percent offering of the Saudi state oil assets could yield an instantaneous $100 billion dollars, if the $2 trillion-dollar valuation of Saudi Aramco is accurate. That’s a lot of capital to start the process of rebuilding a Saudi economy from one that is now virtually completely reliant upon the State. 75 percent of the Saudi public is under 35 years old, and they are starving for a new economic infrastructure that will bring job opportunities, cultural diversity, music, education – global access of all kinds – the kind of freedoms that the 2010 Arab Spring uprisings were supposed to deliver. Only this time, the push for change is coming from the top down, not as a populist movement from the people upwards.

It’s hard to overstate the importance of this story for us as energy investors going forward, as it will dominate Middle East geopolitics for decades.

And the bottom line is this – it all comes down to oil.

At a $40-barrel price, the IPO will be a complete bust, and without that economic power from oil diversification, the push forward on all the other social and cultural changes the youth are yearning for in Saudi Arabia, (and in the rest of the Arab world) is guaranteed to fail.

At $75, or better still $100 a barrel – the Prince will wield the economic power to enter the Western capital markets as a player who has executed a brilliant and revolutionary plan on his way to the Saudi throne, where he will sit for decades. He will be able to avoid the likely rebound of angry cousins and conservative clerics an economic failure of a weak IPO will surely bring.

It’s enough to say that the balance of Middle East politics, from Iraq and Iran to Israel, all will be determined by the outcome of the Crown Prince’s grand strategy.

And all of it relies on a very, very high price for oil. That should inform us to a great degree on how we should be investing right now.

By Dan Dicker