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I just got back from Abu Dhabi, in the United Arab Emirates, where I attended a series of meetings with colleagues from across the energy “universe.”
The scope and pace of development in this Persian Gulf city-state are staggering. Just five years ago, the astonishing, massive Etihad Tower complex we stayed in didn’t even exist. This place is constantly expanding and reinventing itself.
So Abu Dhabi was an apt setting to discuss the sweeping changes that will shape the immediate future of energy investing – changes that threaten the fragile political order of the Middle East and will likely force a redrawing of U.S. security interests.
Everything is in flux right now, so I’m recommending energy investors look at one particular kind of oil producer that should prove largely insulated from what’s coming next.
But first, let me show you what’s at stake here…
The Persian Gulf States Aren’t Waiting to See How Trump Shakes Out
Nearly three weeks later and Americans are still working out and debating the implications of an as-yet obscure Trump administration. This process will last for weeks more as the public digests news of cabinet and other West Wing appointments ahead of Trump’s Jan. 20, 2017, inauguration.
But the energy and energy finance players of the Persian Gulf are already reacting – in two ways.
The “exoteric,” or outward facing, for-public-consumption demeanor among government ministers, oil players, and banking and finance interests I met with in Abu Dhabi is calm, noncommittal.
The other layer is esoteric; this concerns the policy implications of all of these events, and the real meaning of the response. And on this level, I experienced some of the most pronounced reactions I’ve come across in some time.
You need to understand the personalities at the meeting – the ones doing the responding.
They aren’t given to overreaction. They are knowledgeable, well-seasoned veterans of the energy space. Rarely nonplussed, these professionals are architects of huge projects, oversee access to large investments, who, to boot, have witnessed just about anything you can think of.
In fact, the 10 people I met with in Abu Dhabi have a combined 238 years of energy sector experience.
Frankly, I expected to hear from them some concerns over the change in political weather back home, expressed in private conversations. But nothing like what I heard.
They’re concerned, to put it very mildly, with two things…
Trump’s Upset Win Is Already Reshaping the Middle East
OPEC and the international coterie of moneyed interests that accompany the cartel are not waiting for the new government to take shape in Washington, D.C. They know Trump has pledged to make the U.S. energy independent. That’s nothing new. Indeed, we’ve been talking about (and profiting from) the prospect of U.S. energy independence for several years now, here and in Oil & Energy Investor.
But the new administration is going to expedite that – although nobody has yet told us how. Nonetheless, the writing is on the wall. And it’s enough to prompt some major reversals in policy here.
The Saudis have already thrown down the gauntlet. Their Energy Minister, Khalid al-Falih has warned that OPEC will not tolerate any cuts in U.S. oil imports.
The reason is simple: These days the oil market is genuinely globally integrated. Think of the crude oil sector as a balloon. Squeeze it in one place, and it will just bulge out somewhere else.
So any move to change dynamics in one location, say, the United States, will have consequences elsewhere.
But in the current environment, OPEC is likely to experience internal difficulties, as the cartel puts forward a production cut or cap in a market it no longer effectively controls. As I have said before, controlling 40% of the world’s oil supply just doesn’t buy what it used to.
Combine this with the cartel’s big three (Saudi Arabia, the UAE, and Kuwait) moving to diversify their revenue bases, and it’s clear that OPEC is rapidly becoming a two-tier organization.
That is going to be very destabilizing to the whole region. But that’s not even the most serious, or urgent matter we grappled with during my time in Abu Dhabi.
This one derives directly from Trump’s victory.
Pulling Out of the Iranian Nuclear “Deal” Could Destabilize the Region
On the campaign trail, Trump often pledged that he would throw out the Iranian nuclear accord. For this region of the world, that has immediate and significant consequences – for crude oil as well as each country’s view of national security.
Now, there’s been an ongoing debate in the United States over whether the accord should have been signed in the first place. However, if that agreement is now invalidated, Tehran begins another arms race with a strengthened Russia ensconced in nearby Syria and an already strong position in the Iranian nuclear energy industry.
Flash points like Syria to the north and Yemen to the south quickly intensify. Even a weakened ISIS does not bring about much encouragement in Iraq. That merely allows the Saudi-backed Sunni and Iranian-backed Shiite domestic disagreement to unravel Iraq.
The other main Iraqi ethnic division – the Kurds currently inhabiting the autonomous region of Kurdistan in the northeast of the country – will formally declare independence in the face of such instability.
In turn, Kurdish populations in eastern Turkey, southeastern Syria, and northeastern Iran will then create escalating problems for those three countries, as their borders come under renewed assault.
A similar sectarian problem has been festering in the tiny state just to the north of the UAE: Bahrain. There a Sunni royal household has been at odds with a Shiite majority population. The popular unrest has been intensifying – with Iranian support.
Meanwhile, Saudi military forces are ready to move across the King Fahd Causeway connecting the island nation to the mainland Arabian Peninsula to support Bahrain’s Sunni government.
In short, this entire region is a tinder box. And one needs to be careful not to add to the kindling – for their sakes, our sake, and, of course for the sake of oil price stability.
It’s for precisely this reason that investors would be well-advised right now to look at domestic U.S. shale companies, rather than Middle Eastern oil players.
It’s going to make today’s OPEC summit in Vienna all the more interesting. We’ll see these regional rivalries play out in real time.
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