By Matein Khalid: Chief Investment Officer and Partner at Asas Capital
November was a beautiful month for bulls on the North Sea Brent futures contracts traded on the London IPE and Chicago Merc. After all, Brent crude surged from $58 in late October to almost $64 over this weekend ($61.25 at publishing). The wet barrel market prices in a Saudi brokered output cut when OPEC’s ministers meet in Vienna for their conclave next week, led by the kingdom’s Prince Abdel Aziz bin Salman Al Saud. The grapevine suggests that Saudi Arabia wants a price near $70 Brent this month after the Aramco IPO lists on the Tadawul on December 4 to ensure the biggest IPO ever seen in the history of the kingdom’s capital markets is a blowout success.
The oil trading grapevine whispers that Saudi Arabia, UAE, Russia, Kuwait and Iraq have agreed to increase the size of the OPEC-plus cut from 1.2 million bpd to 1.8 million bpd and that Prince Abdel Aziz and Russian Oil Minister Alexander Novak will announce this in Vienna at the press conference. There is one existential rule in my global macro paradigm: never, ever, ever be caught short black gold (Brent or West Texas) when Saudi and the Kremlin want the price of crude oil to rise. There are also multiple compelling macro reasons why I would remain long Brent oil futures and even the sad sack, drop dead, zombie money oil and gas shares – the worst performing sector of 2019 and the past decade, the Big Oil Cinderellas of Wall Street. Why? Five reasons.
One, an OPEC-Russian output cut for another 600,000 bpd will cause tightness in short term distillate inventories as an Arctic winter hits North America (but thankfully not sunny, safe Dubai and Abu Dhabi where I am home for the National Day holidays – hence this column!).
Two, I believe the Conservative Party under Boris Johnson will win the UK general election on December 12, putting pressure on the US dollar. My recommendation to buy sterling at 1.20 way back in September for an initial 1.30 target has already made big money/chump change for some of the coolest investors in the Gulf. The best is yet to come if Boris (or the electorate of the sceptered isle) renews his lease on his 10 Downing Street bachelor pad on December 12. Jolly boating weather…even though Harrow may be cleverer!
Three, there is now compelling evidence in the data that US manufacturing has slumped, that inflation could drift down to 1.7%, that Wall Street fears a credit bust in the netherworld of the junk bond market (CCC and below) , that high profile corporate defaults are in the pipeline (literally) in the busted retail property space. What does that mean to Matt-san, as my Japanese broker called me? A big swoon in the US dollar is coming as Chairman Powell freaks out and slashes rates two more times in 2020 FOMC conclaves, to a Fed Funds rate of 1%. So, what happens to the Euro, sterling and my anti-buckeroo EM currencies? Houston, we are ready for blast off. What will this mean for the price of Brent crude? Take a wild guess.
Four, the latest US sanctions have triggered an economic meltdown in Iran and the anti-regime protests have spread to smaller cities in the Mullah Belt, outside the liberal, affluent circles of North Tehran, Tabriz and Shiraz/Isfahan. After all, how long can repressed, economically devastated young people endure a 40 year diet of Supreme Buritto meals in the Pasdaran microwave? This could mean Iran lashes out against the oil infrastructure/shipping lanes of the Gulf, as it did with the missile/drone attacks on Abqaiq, the shooting down of a $130 million Pentagon Global Hawk surveillance drone and VLCC tanker sabotage in the Strait of Hormuz and Gulf of Oman. This time, if it happens, the F-18 Hornets will soar from the decks of Uncle Sam’s carrier battle fleet and Tomahawk missiles will hit their pre-assigned targets. Why? President Trump needs to show the Dems and his own trailer trash voter base who is boss (capo dei capi!) on the geopolitics and national security stage. When Presidential elections happen, warplanes and missiles fly in the Gulf – even poor Jimmy Carter unleashed the angels of death over the Persian salt-desert in April 1980.
Five, the Saudi Aramco IPO on the Tadawul will be a domestic sensation, even at the $1.7 trillion valuation the world’s top fund managers refused to pay (18 times earnings and a 4.5% dividend yield). I hear that the Saudi domestic banks have given (yalla HSBC!) 50% loans to retail (guys, please remember Dana Gas IPO madness as I do) and sovereign wealth funds in Abu Dhabi, Kuwait, Singapore, China, Russia etc will all become cornerstone investors in the IPO, as will (I hope) Masayoshi-san’s Softbank since his $100 billion Vision Fund has $45 billion of the kingdom’s loose change petrodollars invested in such world class unicorns like WeWork and the Uber IPO. What does the kingdom’s technocrats (the top energy technocrat is an Al-Saud prince for the first time in Saudi history) do to support the Aramco listing on December 4? Announce a new OPEC plus output cut deal to the world in Vienna.
What is my UAE National Day gift to my cherished readers/friends/fellow investors in the Gulf? A (hopefully) money making idea. So the Saudi public will go wild for Aramco’s Tadawal IPO. Yes, but foreign retail investors cannot benefit from the success of an oversubscribed domestic Saudi IPO? Yes, they can. How? If they happen to own the kingdom’s exchange traded fund listed in New York (symbol KSA), a tracker for the Tadawul index. Who will dominate the Tadawul index on December 4 after the Aramco listing? Stupid question. Get real friends, Romans and country-homies, as Marcus Antonius wept at old Caesar’s funeral.
May God’s grace touch all my brothers and sisters in the Gulf for the UAE National Day – Aishi Biladi. I have goosebumps in my soul as I hear the Emirati anthem, same as for Pak sarzamin shahdbad/Soni Dharti. It’s love, you see – love of an idea, a country, a globalized, tolerant corner of Arabia. Remember, the things we do in life echo through eternity – strength and honour.