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Saudi Arabia is not just a major oil exporter, it is also a medieval kingdom. Saudis would probably not like their country being described thus, but in reality it is run as a private fiefdom by a small cabal of princes, all descended from the country’s founder. It is a country where dozens of its nobility have held all the top jobs in government, while at the same time enjoying the fruits of the billions of dollars in revenues the country’s oil reserves produce.

Saudis are geting restive, however, and if there is one thing Saudi princes fear the most, it is a repeat of the revolutions that occurred in countries like Egypt and Libya, not to mention Bahrain, back in 2011. It is in this light that oil traders need to view the recent purges of the Saudi elite by Prince Mohammed bin Salman as positive for the Saudi economy: it represents a concerted effort by reform-minded princes to remove some of the more corrupt elements of the royal family that have been blocked efforts to further modernise the country.

Any political tension in Saudi and the Gulf states will drive the oil price up. Brent crude was trading at $64/bbl at time of writing, having risen from the $50-52 range in mid September. Brent crude futures have literally put on almost $10/bbl in the last fortnight in what has been a dramatic move, fuelled (if your forgive the pun) by medium term OPEC cuts and not political turbulence in Saudia Arabia.

The fall of Prince Alwaleed bin Talal

Among those arrested in the purge was Prince Alwaleed bin Talal. He owns Kingdom Holding, an investment vehicle which in turn invests in major stocks like Apple, Citigroup and Twitter. Many similar Saudi funds exist, channeling the wealth of princes into non-oil assets globally, including listed FTSE 100 and S&P 500 stocks. But what happens when their controllers are under house arrest?

“Prince Alwaleed holds hundreds of million-dollars worth of stakes in international hotel groups, including Four Seasons, AccorHotels and the Savoy, and global names such as Twitter, Lyft, JD.com, Citigroup and 21st Century Fox,” says Ipek Ozkardeskaya, Senior Market Analyst with LCG. “Investors will be watching what could happen to Alwaleed’s holdings under his arrest and how these companies’ stock prices will react to the news. For many of them, the impact should not extend beyond an eventual knee-jerk sell.”

Investors should not underestimate the impact of the arrest of princes like Alwaleed bin Talal. While they exercise considerable influence within Saudi Arabia, they also control billions of dollars in assets in stocks. These are now assets other members of the Saudi government control.

So what next?

This is a big deal for Saudi Arabia. Here at The Armchair Trader we saw two possible scenarios for the kingdom – either the start of some brutal reforms of the nature we are seeing this week, or a popular revolution on the streets, which was definitely brewing.

Saudi Arabia has been seeking to distract its people with crises abroad, which do admittedly have the potential to threaten its security, but the Crown Prince needed to start using his new broom to sweep away some of the more corrupt elements of his government.

WTI crude futures have broken past $56/bbl as oil traders also recognised that Mohammend bin Salman supports the current OPEC policy of cutting production.  And we have an OPEC meeting due in Vienna this month. Some oil analysts are now expecting further cuts, which could push WTI futures past the $60 mark.

The Armchair Trader says:

Watch out for further excitement in the Saudi halls of power this month – now that Mohammed bin Salman has moved against the likes of Alwaleed bin Talal, he will need to push his reform agenda more quickly to forestall any counter-moves by reactionaries who don’t like the look of what he is doing. This will push the oil price higher in the short term. But don’t forget, with WTI oil approaching the $60 mark, there are all sorts of new sources of production that can come onto the market as crude oil gets more expensive and more profitable.

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Please note this article does not constitute investment advice. Investors are encouraged to do their own research beforehand or consult a professional advisor.

Stuart Fieldhouse

Stuart Fieldhouse

Stuart Fieldhouse has spent 25 years in journalism and marketing, including as a wealth management editor for the Financial Times group, covering capital markets and international private banking, and as an investment banking correspondent for Euromoney in Hong Kong. He was the founder editor of The Hedge Fund Journal.

Stuart has worked at CMC Markets, supporting the re-launch of its global financial spread betting and CFD trading platforms. He is also the author of two books on trading, published by Financial Times Pearson. Based in The Armchair Trader’s London office, Stuart continues to advise fund managers, private banks, family offices and other financial institutions.

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