What Happens if the Saudi’s Made it All Up?

With tensions rising once again in the Middle East leading to what will most certainly be a period of intense conflict, the impact isn’t isolated to a single region in the world.  The entire planet feels the effects in the form of higher oil prices, thus forcing every human to spend (or trade) more for access to the single most important commodity necessary for survival.

When rebels attacked Saudi Arabia’s largest oil facility over the weekend, it disrupted half of the country’s oil production.  Approximately five million barrels of oil per day are now suspended, thus leading to an imbalance between supply and demand for crude oil.

According to the International Energy Agency, the world extracts 98.3 million barrels of oil from the earth per day and consumes 99.2 million barrels per day.  The consumption number includes biofuels, such as ethanol, thus leading many to believe the supply and demand figures are as close to exact as they can be, leaving very little margin for error.


As Saudi production decreased by 5 million barrels per day, you can easily see why crude prices spiked 14 percent today as demand has clearly surpassed supply.

For the equity markets in the U.S., stocks are falling, though not as much as many strategists were likely forecasting leading into the week.  And the reason why is simple: Oil is an enviable business model.  When crude prices go up, those who possess the commodity make more money for themselves, regardless of violent attacks or shipping issues in the Strait of Hormuz.

For instance, it would be hard pressed for cynics in the world not to believe the Saudi attack wasn’t an in-house job.  As unpopular as this theory may be, it should be vetted.  After all, with China’s rapid slowdown and demand for oil dropping, wouldn’t it make sense to figure out how to suddenly spike the price per barrel to increase royalties for the Kingdom?  In addition, with John Bolton’s departure from the Trump cabinet, perhaps the Saudi’s felt the end result may not be militaristic, after all.

In addition, who exactly determined there is a five million barrel per day hole in production?  Lots of questions, but answers given may not be fully accepted considering the country we’re discussing hasn’t exactly been on the up-and-up lately regarding real-life situations (i.e., the murder of Jamal Khashoggi).

Regardless, the events of the weekend were enough to send most indices lower, except for the all-important Oil and Gas sector.

Going into the close of the day, the Dow Jones Oil & Gas Index, which consists of widely held components like ExxonMobil (NYSE: XOM), ConocoPhillips (NYSE: COP), and Chevron (NYSE: CVX) posted a solid one-day gain of nearly 4 percent.  The index had been trending higher this month, mostly due to potential production disruptions due to hurricane season, but nobody predicted the events of the weekend leading to a nice daily run-up.

With the champagne popping in the oil pits, one has to wonder: What would happen if the Saudi attacks are a one-and-done deal, and the so-called 5-million-barrel deficit is quickly solved with production from other sources?

The answer is simple: oil prices will rapidly drop, thus reversing course for what we witnessed today from the big oil companies.

Investors can take advantage, though.  The Wellington Sector-Strategy Investment Daily Signal actually takes advantage of selloffs in the industry by going “short” the Dow Jones Oil and Gas Index.  It also takes a long position, when warranted, and utilizes a U.S. Government Bond position, when needed.

The signal has been traded off-and-on since 2009, often private-labeled to other investment firms for use with their clients.  Now, Wellington owns the exclusive rights to the signal, offering it in subscription form so investors can utilize the inputs as they so please and trade the signal with their broker of choice.

After all, there’s no reason not to take advantage of market selloffs, especially if you are able to potentially profit from them.

By: Todd M. Schoenberger of Wellington Insights and the architect of the Wellington Sector-Strategy Investment Signal

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