I understand why the increased tensions between Saudi Arabia and Iran could be interpreted bearishly for oil. There can be no doubt Saudi Arabia is using low oil prices to inflict damage on their neighbor across the gulf. Taking this logic further, as the relationship between the two countries breaks down, it only increases the possibility Saudi Arabia will pump even more oil in their financial war against Iran.
So when Saudi’s recent execution of the a prominent Shiite cleric caused relations between the countries to take a dramatic step downward, the initial worries about crude oil supply disruption were quickly erased by traders who concluded the financial war being waged by Saudi Arabia would enter the next stage, sending prices even lower.
And yeah, I get it. As tensions rise, selling oil seems to be the right trade.
But let’s stop and think about the long term consequences of these developments. The middle east never makes the top ten stable areas of the world list, but the recent developments are the worst down ticks seen in quite some time. Any description on my part to describe all the different cross currents in the complex web of the politics of the region would just embarrass myself. The key point I would like to stress is that over the past couple of decades Saudi Arabia has generally been a stabilizing factor (at least in front of cameras). With the recent transition in power within the ruling Saudi family, that stability has taken a dramatic turn for the worse. Now all of a sudden instead of providing a counter balance to the conflict in the region, the Saudis are aggressively fueling Sunni-Shiite strife.
This conflict might be limited to a financial war with Saudi Arabia attempting to pump Iran out of existence, but what are the chances it does not escalate into a more traditional war? Or even if cooler heads prevail, and it doesn’t degenerate into an all out war, what do you think are the chances some splinter organization doesn’t blow up a pipe line or some other equally damaging terrorist act?
According to the Telegraph, most of Saudi Arabia’s 10.3 million barrels of day pass right through Shia heartland:
Given the fragile state of affairs in Saudi Arabia and the rest of the middle east, it doesn’t take much of an imagination to understand the chances of this conflict being restricted to a financial war of pumping more oil is quite low.
In fact, the more successful Saudi Arabia is with their financial war, the more pressure this puts on the other countries in the region, increasing the chances the conflict takes the next step to full out traditional war.
So while other traders watch the increasing tensions in the mid east while leaning on the crude oil sell button, I have to take the other side of their trade. I know this sounds stupid, but I actually believe rioting in the streets of the mid east is bullish for crude oil. Be careful with the idea that the Saudi Arabian strategy can be contained to the financial arena.
Had to share this next tweet as it is just too good. I don’t watch CNBC, but I do get some pretty funny commentary in my trader twitter feed about its content. When CNBC trotted out the “Markets in Turmoil” special yesterday many of my smart Alec trader types speculated the bottom must be in.
Well, Jason Goepfert from Sentiment Trader sent out this chart that shows these traders are probably more right than they would have guessed:
Thanks for reading and have a great week-end,