Revisiting the 1970s Investing Playbook
On Sunday, Saudi Arabia coordinated with several OPEC and non-OPEC member countries to announce a 1.6 million barrel per day (b/d) production cut. The Financial Times reports that
“The surprise cuts risk reigniting disputes between Riyadh and the US, which last year pushed for the kingdom to pump more oil in a bid to tame rampant inflation amid a surge in energy costs.
People familiar with Saudi Arabia’s thinking say Riyadh was irritated last week that the Biden administration publicly ruled out new crude purchases to replenish a strategic stockpile that had been drained last year as the White House battled to tame inflation.”
The big takeaway here is that Saudi Arabia and the broader OPEC+ coalition is increasingly moving away from the US sphere of influence and supporting the American political agenda of keeping oil supplies flowing and prices low. Instead, Saudi and other key OPEC members are increasingly forging deeper ties with Russia/China. This includes increasingly moving away from trading oil in the U.S. dollar, hastening the demise of the petrodollar, and ultimately, threatening U.S. supremacy in the global economic and financial system.
Consider the following headline developments that have occurred in the last few weeks alone:
- Saudi Arabia reports that it is “no longer interested in pleasing the US” and is adopting an economic strategy “without US dependence.”
- The Chinese Yuan had replaced the US dollar as the most traded currency in Russia
- Malaysia says there’s no reason to depend on US dollar
- Saudi Arabia announced a new oil facility using Chinese Yuan worth $12.2 billion. The Saudi’s are also considering selling oil in Chinese Yuan rather than US Dollars.
This is the largest coordinated push against the petrodollar and the realignment of global oil producers against the U.S. since the 1970s oil crisis.
It’s no surprise that both oil and gold are sky-rocketing, each reflecting the diminished status of the U.S. dollar and the realignment of the global energy trade away from the petrodollar.
Meanwhile, this is all coming at a time that the U.S. remains vulnerable to an oil shock, as the Biden Administration spent the last year attempting to manipulate prices lower ahead of the 2022 midterm elections, draining the strategic petroleum reserve to the lowest levels since 1983:
Finally, when you consider the context of the U.S. shale industry’s crippled production profile, the stage is set for a period of structurally undersupplied global oil market for years to come, with the growing prospect of oil shocks from an OPEC cartel shifting its strategic alliance away from the U.S. towards Russian/China.
History doesn’t repeat, but today’s environment is rhyming with the 1970s… rampant inflation, diminished status of the U.S. dollar, and growing geopolitical risks of oil shortages as the OPEC+ cartel aligns itself with America’s adversaries.
Oil has already been one of the best performing asset classes since inflation first broke out to multi-year highs in 2021, while traditional asset classes like stocks, bonds and real estate have suffered heavy losses.
The bottom line: stage is set for a repeat of the 1970s investing playbook, and oil will increasingly provide a safe haven against this new economic and geopolitical environment:
If you’re interested in investing in oil in the current climate, EnergyFunders America First Energy Fund I is open to investments. Book time with our team or login to learn more.