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Cyril Widdershoven

Cyril Widdershoven

Dr. Cyril Widdershoven is a long-time observer of the global energy market. Presently, he holds several advisory positions with international think tanks in the Middle…

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Saudi Corruption Crackdown Could Permanently Boost Oil Prices

Riyadh

The Middle East is heading for a major showdown, if statements made by Saudi Crown Prince Mohammed bin Salman (MBS) and UAE’s minister of Foreign Affairs Gargash are to be taken literally.

Over the last couple of weeks, the Gulf region has been on a rollercoaster ride. Risk analysts are struggling to deal with the dramatically changing geopolitical and financial environment while a direct military confrontation between the Saudi-led alliance and Iran’s proxies is around the corner.

The signals coming from the Saudi capital Riyadh are still the same; Saudi Vision 2030 and the Aramco IPO are on track. The media remains skeptical about the unforeseen crackdown on corruption, a week after the so-called “Davos in the Desert” financial get-together in Riyadh (October 24-26), where 3,500 CEOs and financial wizards convened.

The fallout of the direct attack on Saudi Arabia’s financial moguls and construction giants, such as Prince Al-Waleed bin Talal and the Binladin Group, would put fear in the heads of investors in New York, London, Beijing and Moscow. Most agreed that MBS overplayed his hand, causing instability in the country and the region.

The reality for insiders, however, looks different. The anti-corruption crackdown by MBS is part of his overall strategy to implement Vision 2030. First of all, the Davos in the Desert meeting showed the financial world’s immense interest in investment opportunities in the kingdom.

Considering that 99 percent of the attendees had never visited Saudi Arabia before, while only the speakers already represented a $22 trillion value of assets under management, MBS could tick off another box on his long list to make Vision 2030 a success.

At the same time, the Trump Administration and the UK government tried to woo MBS to list the Aramco IPO on their stock exchanges. Some would have become more lenient towards a flexible approach when looking at the amount of interest, but MBS upped the ante and pushed for new hard-needed changes. Related: Keystone XL Is Far From Certain

The anti-corruption crackdown was carefully considered and timely, and served not only to remove corruption in the kingdom, but can also been seen as a way to remove remaining opposition to MBS’s future reign.

With military precision, MBS removed most of the obstacles still blocking a possible MSCI Emerging Markets Index listing in 2018. By taking out high-profile businessmen that were already convicted several times for corruption and removing princes that held commanding positions within the armed forces, MBS moved the kingdom towards a more modern economy while consolidating his own power. The inclusion of the kingdom in the MSCI index will bring a multitude of FDI, much larger than the Aramco IPO. The MSCI Emerging Markets Index, for example, gives European pension and investment funds the possibility to invest in the kingdom and trade on its stock exchange. The Saudis have reportedly already attracted $9 billion in recent weeks. Some analysts are much more optimistic, when looking at the long range of IPOs planned on the Tadawul (Saudi stock exchange).

MBS’s domestic popularity has increased in recent months. The Crown Prince has great support among the youth and has shown to be listening to the majority of his people, while being unafraid to make dramatic changes to outdated social structures within the kingdom. Still, MBS understands internal Saudi politics, and will try not to completely upset the establishment.

At the same time, regional instability and unrest complicate MBS’s agenda. The confrontation between Arab nations and Iran has reached a tipping point. And looking at the statements made by UAE’s minister of foreign affairs on November 12 during the Emirates Policy Center’s Abu Dhabi Strategic Debates (ADSD2017) on Sky Arabia shocked the audience. The direct attack and accusations vented towards Iran and Qatar, both accused of promoting instability, financing terrorism and extremism, were of an unprecedented tone. Gargash also accused both of committing “acts of war”, especially via arming Houthis in Yemen and Hezbollah. These accusations are openly supported and repeated by a long list of Arab politicians and leaders.

The war drums are being banged—and this time not as an empty threat, but as a precursor to real military action. Most analysts are looking to Riyadh, as they expect MBS to lead this operation against Lebanon’s Hezbollah and the Iranian IRGC; most likely the lead will be taken by the UAE.

Related: Oil Price Drop Imminent If Moscow Says “No” To Extension

The political show around Lebanese PM Hariri is only part of this. Analysts tend to forget that Hariri’s real power is in Saudi Arabia, where he is the owner of construction giant OGER, currently under investigation as it is in financial trouble. MBS has taken the opportunity to kill two birds with one stone and remove OGER out of the picture in Saudi Arabia while destabilizing Lebanon. This was organized in close cooperation with other Arab leaders. Sheikh Mohammed Bin Zayed, a close friend of MBS, will head the anti-IRGC venture, as Abu Dhabi has been doing for years under the radar in Yemen, Syria and especially Libya.

Military action can be expected, with or without support of Washington. As several Arab ministers and advisors have stated in recent days, it’s time for Arabs to take the future in their own hands. Washington can support, but not lead. If no American assistance is given, others will undoubtedly fill the gap. Moscow has been extremely quiet the last weeks, not indicating any support for Tehran nor trying to mitigate between the Riyadh-Abu Dhabi axis and Iran-Hezbollah. These plans seem to have already been discussed in the respective capitals, as ministers of the said countries have convened in several places.

If action is taken against Iran and its proxies, OPEC and oil prices will be impacted immediately. Oil price increases of $5-10 per barrel a day could be a distinct possibility. An escalation in Lebanon, due to inclusion of Israel in the action, or maritime traffic attacks in the Gulf, would only push prices up further. After years of low geopolitical risk premiums, risk has returned to the market. This time, however, they are new players, unknown to the majority of risk analysts. MBS and Iran will put volatility back in the market where it belongs.

By Cyril Widdershoven for Oilprice.com

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Leave a comment
  • Da on November 21 2017 said:
    Saudi Royals cant war with Iran cause Saudu citizens hate their Royals more than Iran does.
  • Amvet on November 21 2017 said:
    Saudi Arabia and the other Gulf dictators are swimming in modern weapons, but the question is who is operating these weapons. Having spent 5 years in SA I can guess that foreigners are doing most of the work. Many foreigners have not been paid recently.
    We could have a case of foreign mercenaries taking control.
  • Neil Dusseault on November 21 2017 said:
    Well, after reading this article, it appears it has already been decided: Bullish on oil, folks!

    Why are there no 'bearish' articles on this web site? Really? Nothing to 'offset' the "let's all bid the price of oil to $200 a barrel" sentiment?

    I am not an "oil bear". But any article presented during a bear market usually includes some hope of rising prices for the oil bulls...but the opposite never occurs during a bull market. If an oil bear says something about $40/barrel oil (or less) then they are called "being greedy" by numerous oil bulls.

    I am simply suggesting that writers of oil-related articles at least make some attempt to keep it balanced. Yes, there are arguments to be made which may be the very reason the article was created to begin with, and those arguments can appear 'tilted' in one particular direction for prices.

    But read again from the last paragraph of this article above (purposefully intended to leave you with this final thought):

    "If action is taken against Iran and its proxies, OPEC and oil prices will be impacted immediately. Oil price increases of $5-10 per barrel a day could be a distinct possibility."

    Now, can you ever imagine an article that mentioned the price of oil dropping by $5 or $10 PER DAY?! Why is it that whenever there is bullish sentiment in the market, analysts don't just make predictions of $1 - $2 per day or maybe $5 - $10 over a season at least, but when oil crossed $50/bbl instead of calling for $60 oil, instead I read articles on this very site that mentioned $70, $80, $90, and literally one for prices well beyond $100/bbl as a new norm...this is a serious double-standard that can only be likened to the behavior of someone strongly addicted to serious drugs--in other words, they go wild with their words.

    If you disagree with me, I understand and that is fine...I am kindly representing my 1st Amendment rights by not using profanity, or name calling, or wishing anything upon someone, etc. I just believe everyone should consider that while yes, if oil prices go too low, it is not good for at least one sector of the U.S. (and that being the oil industry) but good for EVERYONE ELSE; but if prices go too high it is not just the U.S. consumers that feel the pinch through gas prices, plastics, etc. but also a very scary reality that more of our wealth in transferred to countries such as Saudi Arabia: One of the largest importers of our arms. So I'll leave you with this final thought: What could possibly go wrong?

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