A Purge in the Kingdom

Saudi Arabia had a tough weekend.

Missiles were fired from Yemen into Saudi Arabia. The missiles were aimed at an airport outside of Riyadh, which is about 620 miles from Yemen. The Saudis used a U.S.-built Patriot surface-to-air anti-missile battery.

Prince Alwaleed bin Talal, the familiar Wall Street billionaire, was arrested over the weekend on corruption charges. He was a big investor in early internet startups like Twitter and Priceline. In the financial world, he is the face of Saudi Arabia.

Saudi Prince Mansour was killed in a helicopter crash 70 miles from the border with Yemen - cause of the crash is unknown. Mansour is the son of Prince Muqrin bin Abdulaziz, who resigned as crown prince to make way for King Salman's son Mohammed bin Salman (a.k.a. MBS).

WTI crude oil jumped to $56.01 this morning on the news. Brent was sitting at $62.57. Gold was somewhat higher at $1,271.40 an ounce. Prince Alwaleed's Kingdom Holding Company fell over 7% this morning.

The Tadawul All Share Index is, inexplicably, holding up. It is only down 2.2%. Perhaps it is getting support from the government...

The Kingdom Purge

MBS is consolidating power. What was an underground civil war in the Kingdom just went public. King Salman drew up a list of his enemies and went after them on corruption charges - and everyone is corrupt. It is reported that the Ritz-Carlton Riyadh is now a jail for royals.

This action was preceded last week by the mass roundup of clerics who spoke up against the new law that allows women to drive.

Despite talk of reform, it is clear now that MBS is a new strongman in the region. He is in a hot war with Yemen and doing badly in terms of blood and treasure. Some believe that the Saudis have lost over 400 Abram tanks fighting the Iranian-backed Houthis. A recent Harvard study estimated that it is costing the Kingdom $200 million a day.

MBS is also stepping up aggression towards Iran and blockaded Qatar.

The low price of oil since 2014 has caused a great deal of pain in Saudi Arabia. Starting with $737 billion in foreign currency reserves, they now have $487 billion as of July 2017. They are also taking on debt through the issue of Islamic bonds.

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What Comes Next for Oil?

Obviously, the Iranian hawks feel they are winning by bogging down Saudi Arabia in Yemen. They also feel good with their presence in Iraq and Syria. The new Prince of Saudi Arabia has to win on the battlefield. A hot war between these two Middle East powers would send oil sky high.

The Saudis produce 10.4 million bbl/day; Iran produces 3.99 million bbl/day.

On the international side, global demand is picking up with the global economy. China, the EU, and the U.S. have all reported accelerated growth last quarter.

Furthermore, the U.S. is exporting more oil due to the higher price of Brent on the world stage.

The market is getting tighter. Production in new fields has been stagnant for years. Fracking has a short time horizon per well.

Given the nature of markets overshooting, and even without a major disruption like a Saudi civil war, I expect oil to hit $90 over the next few quarters, at which point small-cap upstream oil companies will thrive.

Sincerely,

Christian DeHaemer

Since1995, Christian DeHaemer has specialized in frontier marketopportunities. He has traveled extensively and invested in places asvaried as Cuba, Mongolia, and Kenya. Chris believes the best way tomake money is to get there first with the most. Christian is the founderof Crisis & Opportunity and Managing Director of Wealth Daily. He is also a contributor for Energy & Capital. For more on Christian, see his editor's page.