After a series of arrests of Senior Saudi political and business moguls last weekend, investors are concerned that Saudi Arabia is more risky than previously thought, inflicted by the plight low oil prices has had on the kingdom.
Investors are deciding whether the arrests are a sign of Prince Mohammed bin Salman’s commitment to crackdown on corruption or is it a sign of incredible political instability and a warning of more disorder in the future.
The demise of the Saudi economy has been sharp since oil slid from the $100-per-barrel in 2014. The nation liquidated more than one-third of its foreign assets since 2014.
The International Monetary Fund estimates that Saudi Arabia must reach $84 per barrel before breaking even, and while Brent oil reached a two-year high this week, it is still far off that mark.
Saudi Arabia’s ability to accumulate wealth through oil has decreased, leaving the country to borrow at record levels in 2017.
However, as oil prices start to creep up once again, Saudi Arabia can use the extra funds to plunge into diversifying its portfolio, reducing its dependence on oil.
The crown prince’s capacity to rebalance the budget and the sense of uncertainty surrounding investor’s ability to continue to operate in the region has dampened sentiment in the corporate sector.
Additionally, the disruptions could be a sign of war in the region, as tensions rise between Saudi Arabia, Yemen and Iran. The conflict could disrupt oil prices.
Although, since crude oil only advanced 2.4% on the prospect of heightened uncertainty in the world’s largest exporter of fossil fuels, this could be a sign that Saudi Arabia is losing its leverage in the oil market. As technologies advance and the world becomes less reliant on oil, ‘big news events’ will become less impactful on oil prices as the fundamental nature of the industry changes.
We have seen investors take-profit as oil approached $64.60 today, declining to trade at $63.22 per barrel.
Investors are aware that shale producers will amp up output once oil trades above the $60-mark, which could cause prices to decline as supplies tip upwards.
On the other hand, markets have tightened, and a refreshed sense of bullishness has regained its hold on oil markets.
Stronger-than-expected demand and lower inventories have been persistent in the past few months. Meanwhile, OPEC and allies have expressed support for expending production cuts well into the second half of 2018.
Crude oil inventories will be released at 15:30 GMT and are expected to come in at -2.5 million barrels.