econintersect.com
       
  

FREE NEWSLETTER: Econintersect sends a nightly newsletter highlighting news events of the day, and providing a summary of new articles posted on the website. Econintersect will not sell or pass your email address to others per our privacy policy. You can cancel this subscription at any time by selecting the unsubscribing link in the footer of each email.



posted on 18 May 2016

Saudi Sea Change Shakes Markets

by Jim Pearce, http://www.investingdaily.com/

Investing Daily Article of the Week

Toward the end of a long and productive life, my late father-in-law came to live with my wife and me when he could no longer look out for himself. For a nonagenarian he was remarkably lucid and able to recall the details of his life many decades ago. So I often asked him about his early adulthood, when he moved to Saudi Arabia to work for the Arabian-American Oil Company (now Saudi Aramco) shortly after the end of World War II.

He would say:

"It was a real third world country back then with no running water outside of the major cities and local tribal leaders controlling everything that went on in the desert where I was working."

But the partnership between our two countries with radically different cultures worked because it had to: we needed their oil, and they needed the expertise of people like my father-in-law to pump it out of the ground.

That was seventy years ago, and since then Saudi Arabia has catapulted to the top of the oil-producing world thanks to canny leadership and an unwavering commitment to controlling the global petroleum supply. At the heart of that strategy was its dominance of OPEC (Organization of Petroleum Exporting Countries), which for the past 23 years was orchestrated by Saudi Oil Minister Ali al-Naimi.

However, at the age of 80 and his country on the precipice of significant economic transition, Naimi stepped down as Saudi Oil Minister on Monday to make room for his replacement, Khalid al-Falih. The stock market took the news hard, with most oil companies immediately dropping in value over the prospect of instability within the senior OPEC ranks. All three of the energy companies in the PF Growth Portfolio - National Oilwell Varco (NYSE:NOV), Marathon Petroleum (NYSE:MPC), and Chevron (NYSE:CVX) - dropped on the news, even though one is a drilling equipment manufacturer, another is a refiner, and one is a diversified oil conglomerate so the financial impact on each of them will not be the same.

The price of oil also took a quick hit, as investors reckoned that the new Saudi Oil Minister will not enjoy the same degree of influence as his predecessor. And since the primary objective of OPEC is to manipulate the supply of oil, anything that may lessen members' willingness to work in unison increases the chances that its member countries may break from the pack and ignore production quotas, thereby dumping more supply on an already saturated market.

However, this change in command within Saudi Arabia is only one variable in a complex energy equation that can change quickly.

Of greater concern are possible heightened tensions within OPEC now that Iran is adding its petroleum to the global oil supply. Saudi Arabia has a fragile relationship with Iran, avoiding armed conflict with its confrontational neighbor while enabling sanctions by the U.S. and its allies to keep Iran somewhat contained. But those sanctions have recently been relaxed, so now the two countries have been forced into working out some sort of mutually beneficial relationship.

If they cannot, then the world's oil supply could be thrown into a prolonged state of chaos. That could be good news for North American producers, who are happy to step in whenever OPEC nations are in a state of turmoil. Nobody wants a war, but everyone knows that one between Saudi Arabia and one of its neighbors is not out of the question. Throw into the mix a new U.S. President nine months from now, and you have all the necessary ingredients for a highly charged political environment in the Middle East next year.

Against that backdrop, Saudi Arabia announced last month it might sell off 5% of its stock in Aramco in an IPO for $2 trillion, or more, to raise capital for investment in other industries. The country is starting to feel the pinch of diminishing oil profits, and needs the cash to diversify into other sectors that will sustain its economy once petroleum is no longer financially viable to pump out of the ground - something its outgoing oil minister said could happen within the next 25 years.

This puts Saudi Arabia in an awkward position. To sell that stake for maximum value, Saudi Arabia would prefer to see less production by its OPEC cohorts to drive up the price of oil and thereby increase the current value of oil revenues. If it fears growing output from Iran - or any other producer in the region - may threaten its ability to control oil prices, then it may feel compelled to do something to prevent any of them from fulfilling their ambitions until the deal is consummated.

I can't help but wonder what my father-in-law would think if he were around to see this latest development in Saudi Arabia's evolution from a desolate nation-state 100 years ago to one of the world's leading economic powers today. The country is rapidly turning the corner to a future without oil as its "ace in the hole," and how it navigates the next couple of years will affect the fate of North American oil companies, and could determine the fate of its people for the next century and beyond.

>>>>> Scroll down to view and make comments <<<<<<

Click here for Historical Investing Post Listing










Make a Comment

Econintersect wants your comments, data and opinion on the articles posted.  As the internet is a "war zone" of trolls, hackers and spammers - Econintersect must balance its defences against ease of commenting.  We have joined with Livefyre to manage our comment streams.

To comment, using Livefyre just click the "Sign In" button at the top-left corner of the comment box below. You can create a commenting account using your favorite social network such as Twitter, Facebook, Google+, LinkedIn or Open ID - or open a Livefyre account using your email address.



You can also comment using Facebook directly using he comment block below.





Econintersect Investing


search_box

Print this page or create a PDF file of this page
Print Friendly and PDF


The growing use of ad blocking software is creating a shortfall in covering our fixed expenses. Please consider a donation to Econintersect to allow continuing output of quality and balanced financial and economic news and analysis.


Take a look at what is going on inside of Econintersect.com
Main Home
Analysis Blog
The Expected Effects of Petitions to Improve the Monetary System
Energy and Falling Productivity
News Blog
Voters Still Distrust Both Presidential Candidates
What We Read Today 27 September 2016
How To Get People To Exercise
September 2016 Conference Board Consumer Confidence Now At Highest Level Since the Great Recession
Richmond Fed Manufacturing Survey Remains In Contraction In September 2016.
September 2016 Chemical Activity Barometer Continues to Signal Improving Economic Growth
Case-Shiller Home Price Index July 2016 Year-over-Year Rate of Growth Decelerates
Between Geopolitics And Technology
Infographic Of The Day: See Every Single Part Inside An IPhone
Early Headlines: Asia Stocks Mixed, Europa Water Plumes, All About The Debate, Putin Reacts To Debate, Oblivious Students, India Rocket Success, China Profits Surge And More
September 26, 2016 Weather and Climate Report - Not Quite the Camino Real
The Dominant Forces In The U.S. Gun Market
69 Percent Of Americans Have Less Than One Thousand Dollars In Savings
Investing Blog
Monday Morning Call 26 September
We're Back Here We Started
Opinion Blog
Housing Inflation- A Simple Case Of Supply And Demand Exacerbated By Low Rates
Heading For A Fall? With Summer Over, Europe Must Face Up To Its Mounting Crises
Precious Metals Blog
War On Cash Turns To $20, $50, And $100 Bills
Live Markets
27Sep2016 Market Close: US Major Indexes Closed Higher As Commodities Fell, WTI Crude Slipped Three Percent
Amazon Books & More






.... and keep up with economic news using our dynamic economic newspapers with the largest international coverage on the internet
Asia / Pacific
Europe
Middle East / Africa
Americas
USA Government



Crowdfunding ....






























 navigate econintersect.com

Blogs

Analysis Blog
News Blog
Investing Blog
Opinion Blog
Precious Metals Blog
Markets Blog
Video of the Day
Weather

Newspapers

Asia / Pacific
Europe
Middle East / Africa
Americas
USA Government
     

RSS Feeds / Social Media

Combined Econintersect Feed
Google+
Facebook
Twitter
Digg

Free Newsletter

Marketplace - Books & More

Economic Forecast

Content Contribution

Contact

About

  Top Economics Site

Investing.com Contributor TalkMarkets Contributor Finance Blogs Free PageRank Checker Active Search Results Google+

This Web Page by Steven Hansen ---- Copyright 2010 - 2016 Econintersect LLC - all rights reserved