Oil Wars Escalate As Hillary “Wins” Debate

We have previously called Donald Trump a “black swan walking” and not necessarily because we disagree with his politics. It’s just that no one has any clue what he would do as president (besides try to force Mexico to pay for a wall that will never, ever be built) and the market hates uncertainty.

We watched the debate. Start to finish. And frankly, we’re not sure how Hillary Clinton supposedly “won,” because it didn’t look like that to us. It looked like the exact opposite. But no matter, the market is the market and we’re rallying on the Clinton “victory.” Now make no mistake, Trump had his characteristic gaffes, but relatively speaking he was under control. Of course Clinton came across as the elder stateswoman (because she is), but Trump didn’t flip over the podium or call anyone a rapist, which, frankly, for him is a step in right direction. He seems to be refining his political skills as he goes forward which is a dangerous thing - that is, what happens by the third debate?

It kind of seems like the market is hanging onto anything they can when it comes to a Clinton victory. She displayed a rather remarkable (not to mention arrogant) reaction post-debate and we’re just not sure it’s warranted. As always, we care about markets, not politics. To be sure, you can’t have one without the other, but start intertwining the two too much and you get trouble (we won’t mention any names).

So here we are rallying on Hillary which is fine, especially if you’re invested, but the other story of the day is of course oil. Here’s the problem going to into talk in Algeria:

(Bloomberg)

The Saudis are going broke fighting this war. They just are. We’ve been warning about this for months. They figured they’d be able to i) bankrupt US production quickly, and ii) force the Russians to give up their support for Assad’s Alawite government in Syria thus breaking the Shiite crescent. Neither of those two theses played out. Russia said to hell with oil prices and invaded Syria (literally) on behalf of Assad, and ZIRP kept capital markets open for US producers. Now, Riyadh is in a bind. Either start borrowing (more), cut production, drop the riyal peg, or sink into financial oblivion. Add in the cost of financing the Sunni insurgency in Syria and the war in Yemen and you’ve got yourself a veritable fiscal disaster.

Now make no mistake, the Saudis are in no danger of losing their oil production throne to Iran. But, consider this, from Bloomberg:

“Saudi Arabia will suffer a fiscal deficit equal to 13.5 percent of gross domestic product this year,

compared with one of less than 2.5 percent of GDP for Iran, the International Monetary Fund estimates. The IMF says the Saudis need oil close to $67 a barrel to square the books. For Iran, it’s lower, at $61.50. Brent crude, the global benchmark, fell below $46 a barrel in London on Tuesday.”

See, that’s bad news.

The geopolitical landscape is changing in the Mid-East. It’s the US, the Saudis, Qatar, and the UAE against Russia and Iran.

And it’s not clear who wins.

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