The Commodity Investor: For US & Saudi Arabia, Lower Oil Prices A Political Weapon

October 28, 2014



Tensions in the Middle East

As cold war tensions grow between Russia and the United States, a more overt conflict is being played out in the Middle East. Conflict with ISIS has reached such proportions that military action is being carried out against ISIS targets throughout the region.

One of the main sources of cash for ISIS has been selling oil in the black market. Therefore, lower oil prices will also put a strain on ISIS finances and its ability to recruit and wreak havoc across the Middle East.

Another important regional conflict that is being played out in the oil markets is between Saudi Arabia and Iran. It is no secret that the two regional rivals have been fighting each other in proxy wars stretching from Lebanon and Syria all the way into deep territorial Iraq.

Recently, the Saudi oil minister claimed that the government was “fine” with $80 oil, which sent shock waves across Tehran and other countries that rely on high oil prices to balance their government budget.

Iran relies heavily on oil exports to fund its government; in fact, so much so that Iran needs a $120-130 price range to not go into deficit territory. At $80, it is deeply in the red, which is putting pressure on its military and intelligence agencies and its ability to exert its influence regionally.

Meanwhile, Saudi Arabia can run a budget surplus even at $85. Furthermore, Saudi Arabia only has a 2.5 percent debt-to-GDP ratio, which means it can easily borrow on the international markets, should it need to. Therefore, it’s no surprise that the Saudis are “fine” with oil at these price levels: Not only can they survive at these prices, but it puts a lot of pressure on their biggest regional rival.

As the two most important actors in the oil markets, the United States and Saudi Arabia are coming under a lot of pressure from other oil-dependent countries that these two countries are colluding to keep prices low to gain their political and regional objectives. While there is no concrete evidence of this, it is certainly an important piece of analysis to keep in mind.

Disclosure: The author doesn’t have any positions in the stocks mentioned.

Amine Bouchentouf is a partner at Parador Capital LLC, an institutional advisory firm focused on commodities and emerging markets. He is the author of the best-selling “Commodities For Dummies,” published by Wiley. Amine is also the founder of Commodities Investors LLC, an advisory firm dedicated to providing insightful information on all things commodities. He can be reached at [email protected].

Find your next ETF

Reset All