How to hedge the Saudi monarchy?
We’ve asked it before on FT Alphaville, given how unrest would throw the oil market into extreme volatility. We’re sceptical you could even try, but we’re sure there’s more to it than the ‘all bets are off’ line we often hear about the prospect of Saudi protests.
Credit Suisse might have been onto something this week (extending the analysis to Qatar as well as Saudi Arabia):
We advise an overweight stance on the Middle Eastern petrochemicals sector and highlight that any potentially warranted political risk premium is hedged by rise in crude prices impacting earnings positively…
Petrochemical sector earnings are positively correlated to higher crude prices and by corollary to localized regional geopolitical turmoil.
Although ‘localised’ is the kicker here.
Credit Suisse do make some interesting arguments nevertheless. Such as, there’s little expropriation risk in a crisis, because the Saudi and Qatari governments own most of the companies anyway (click chart to enlarge):
While the crude correlation comes from the way petrochemical product prices benefit from the price of naphtha, which reflects crude pricing in turn. It creates a fundamental case for stocks recently panic-sold by local investors. (Gulf bourses rebounded strongly on Tuesday, ironically.)
Except…
While Credit Suisse also advise buying a call option on US crude ($120 a barrel by June, anyone?) because of global panic over a Gulf crisis, we don’t really know how a Saudi revolution would be received or how petrochemical infrastructure would be affected.
For example, take Sabic, one of the world’s biggest petrochemicals companies (chairman: His Highness Prince Saud bin Abdullah bin Thenayan Al-Saud).
Like Saudi Aramco, Sabic has facilities in the eastern province, where a large Shia population struggles for official recognition. That’s been seen as one flashpoint for unrest and even violence towards production, especially with a view to events over the border in Bahrain.
But we wonder if that’s the issue so much as the ‘risk’ that the Saudi government will face demands to liberalise control over national oil wealth. There’s a very detailedrecent declaration of reform by the liberal opposition which is worth a read if you’re wondering what protests would be calling for (HT Saudi Jeans). Naturally, we have little idea of the extent to which the Saudi security forces would be prepared to use violence against any protests, which could change everything very quickly.
In short — the stakes of trying to change the most absolute monarchy in the Middle East do seem to go beyond hedging. Extricating royal control from companies could overturn the country’s stock market even despite upside exposure to what crude prices would likely be doing in the background.
Egypt’s current experience of dealing with dictatorial ties to companies underlines the problem. Even there, family fiefdoms were nothing like the ones Saudi princes have right now.
And as for that background of crude developments – even Credit Suisse’s call option is probably unlikely to capture fully how crazy the post-Saudi oil price would go.
Talk about a black swan, or what?
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