“We have stressed repeatedly that the biggest ‘risk’ to our conservative price forecast is a destabilisation of the situation in Saudi Arabia.”
Carsten Fritsch, Commerzbank, 7 November 2017
More than meets the eye?
“At the centre of the whirlwind stands the impetuous crown prince, Mohammad bin Salman… at the age of 32, he has become the most powerful man in Saudi Arabia since King Abdel-Aziz bin Said, who founded the state.”
The Economist, 11 November 2017
There is, of course, no shortage of people he could go after for corruption. Indeed, one could argue that the majority at least of members of the House of Saud benefit from money siphoned off untransparently from Aramco which many would claim is a corrupt practice.
However, the dismissal and arrest of Prince Miteb bin Abdullah is particularly interesting and may well be indicative. First, Prince Miteb was once widely seen as a potential king one day; second he is the last son of former King Abdullah (a rival branch of the House of Saud) who was still occupying a high-ranking position; third, his dismissal gives MBS more or less total control of the military and security forces.
So, is the bottom line simply that this is another stage in the de facto coup by the Salman branch of the House of Saud, again begging the question of how long it will be before King Salman abdicates in favour of his son.
At least some commentators believe that other motives are also in play. Notably, in Saudi society it is not unusual for recompense to be paid to avoid gaol sentences. My expectation is that most, if not all, of the accused will avoid prison by 'voluntarily' handing over a significant proportion of their total assets to the state. Indeed, bloggers in Saudi are already anticipating that part of the purpose of the whole exercise could be to (effectively) seize assets in order to pay down some of the deficit. Various numbers have been mentioned but the most authoritative I have seen (eg quoted in the Wall Street Journal — subscriber access only) is that those arrested to date may have had frozen up to US$800bn worth of assets actually in Saudi itself (and the focus does seem to have been on people who have extensive in-country assets rather than those with most of their assets overseas).
Arguably consistent with this and fuelling speculation about who else is going to be on the ‘guest list’, is the fact that Riyadh Ritz Carlton, where many of those arrested are being held, is now booked to the end of January; and the nearby Marriott solid through the end of December.
Upsetting the wider balance
“[Saad] Hariri’s resignation was immediately interpreted in the light of the power struggle between Saudi Arabia and Iran.”
Arab Digest, 9 November 2017
Although the evidence supporting the near-consensus that (Saudi-born Sunni) Prime Minister Saad Hariri of Lebanon was forced to resign on 4 November by MBS as part of Riyadh’s deepening regional struggle with Tehran is largely circumstantial, it is very hard to disagree. It certainly risks upsetting the very delicate balance of power in Beirut with potentially serious consequences. Indeed, just a few days before Mr Hariri’s ‘resignation’, Saudi Arabia’s Gulf Affairs Minister, Thamer al-Sabhan, publicly promised “astonishing” developments which would topple Hizbollah; and he subsequently went further, claiming that the regime in Lebanon would "be dealt with as a government declaring war on Saudi Arabia" because of "acts of aggression" committed by Hizbollah.
At the time of writing, Mr Hariri is reportedly under arrest in Riyadh, possibly on corruption charges relating to his business interests before he entered politics. This despite the demands of his (Saudi-aligned) party for his return to Beirut, where all parties have refused to acknowledge his resignation.
However, far from acceding to these demands, MBS seems determined to double down as Saudi Arabia and its closest allies in the GCC order their citizens in Lebanon to leave immediately. Especially if what many see as Saudi Arabia’s inability to better Hizbollah military is accurate (which I believe it is), investors (and others) are right to be concerned that Riyadh will look to inflict more economic damage on Lebanon by, eg, withdrawing deposits on which many Lebanese banks depend and/or kicking out around 400,000 Lebanese nationals who work in the Gulf and account for a large proportion of the remittences which make up around 20% of the country’s GDP.
“…[MBS’s] ambition too often turns to rashness. He led an Arab coalition into an unwindable war in Yemen…. He also sought to isolate Qatar…succeeding only in wrecking the Gulf Corporation Council and pushing Qatar towards Iran.”
The Economist, 11 November 2017
To judge from Mr al-Sabhan’s warning (above) about developments, at least some of these moves were in the pipeline before Saudi Arabia intercepted a ballistic missile fired towards Riyadh from rebel Houthi-held territory in war-torn Yemen on 4 November — an act for which the Saudis blamed Hizbollah and MBS described as “direct military aggression” by Iran. Riyadh has now imposed a total blockade on Yemen preventing aid from reaching the country and risking worsening what is already a major humanitarian crisis there.
In the circumstances, it would not be surprising if MBS took another swipe at Qatar too. There may have been some pre-warning of the arrests in Riyadh to MBS's ally in Abu Dhabi Crown Prince (and de facto ruler) Mohammad bin Zayed (MBZ). The speed with which UAE came out in support suggests prior knowledge. This points to a further deepening of MBS/MBZ relationship generally which does not bode well for Qatar (where they were the prime movers behind the ongoing stand-off) in particular and intra-GCC relations generally.
“It is difficult to disentangle how much of [the recent increase in the oil price] is due to increased demand from, for example, the synchronised global growth upswing, limits on supply, such as OPEC stringently sticking to production quotas and the recent decline in US shale rig count, or indeed other factors like heightened geopolitical uncertainty in the Middle East.”
Nomura Global Markets Research, 9 November 2017
Until very recently, it was, I believe, very hard to put any significant proportion of the (then) 40% rise in the price of Brent crude since 1 January down to perceived political risk. Indeed, it would, in my view, be fair to say that investors have been remarkably relaxed about the continuing turmoil in the Middle East since the 27 November 2014 Opec meeting which triggered the remarkable slide in the oil price. However, it does seem that the actions and rhetoric described above have helped to push oil still higher, ie that perceived political risk, primarily revolving around concerns about Saudi Arabia’s own stability, has come back into the calculus.
What we have seen to date certainly does not constitute a supply-side shock. But it is quite enough to blow my longstanding Brent forecast for the end of this year (ie USD45-55pb) well off course. Especially if investors I was talking to in the Gulf earlier this month are correct in their claim that Saudi Arabia is buying oil futures in an effort to push up the price to lubricate the proposed Aramco listing. Of itself, this may well be sufficient to persuade MBS to continue both his purge and home and his belligerent rhetoric as far as Iran and its associates are concerned. But whether this alone would be sufficient to drive Brent crude to USD70pb even by year-end, as some analysts are now forecasting, remains to be seen.
…and tempting Trump?
“I have great confidence in King Salman and the Crown Prince of Saudi Arabia, they know exactly what they are doing…”
Donald Trump, 6 November 2017
As I wrote a month or so ago, there is already enough going on regionally and in Washington for Mr Trump to react very badly indeed to further perceived provocations and/or successes by Iran. I would not go as far as to assert that MBS may be stirring the pot specifically in the hope of spurring the US into some sort of military action against Tehran (and/or one of its proxy armies); but nor would I rule it out.
The bottom line? Although I would still emphatically label both as tail risks I can’t help but think that MBS’s actions this month have not only put domestic stability in Saudi Arabia under greater pressure but also increased the likelihood of some sort of US military intervention against Iran, possibly as early as 2018Q1.