From massive regional airports whose capacity vastly exceeded even the most optimistic demand forecasts over the next few decades to strawberry farms in the desert destined to fail, the Kingdom had a long string of massive public infrastructure/industry failures.

 

The reasons for these project launches is not really important. Whether they were products of having too much money and too little intellect at the time, or a need to distract the population, or just plain ego, the projects kept coming. More so during the boom cycles than during the busts, but there was was a constant flow of these ridiculous spending extravaganzas that eventually turned into white elephants and were quietly shelved. 

 

The nature, number and financial extent of these white elephants reduced markedly in the 2000's. Some would say the white elephants went extinct. Except for the Jeddah tower, meant to be the tallest building upon completion (over 1km tall). They started building it ten years ago but abandoned it a third the way up. Just like the other structural white elephants of years past, the concrete carcass has been doomed to weather to oblivion over the next few centuries only for future archaeologists to be stumped as to how stupid a conception these projects were in the past.

 

My point is not to reminisce over the asinine decisions of Saudi decision makers when it comes to ego trips. Rather, I would like to point out the importance of the White Elephant concept to our collective investment theses on this board.

 

After all, I am sure we would all agree that Saudi Arabia is the most influential member of OPEC and the oil producing member with the most spare capacity (supposedly), and with the highest proclivity to using it - both ways.

 

Ever since MBS came along, there has been a focus on getting back to basics, being held accountable for initiatives and projects, which has led to a good stretch of reasonable state budgets and well planned investments. In fact, the way Saudi Arabia purposely flooded the oil markets, then invested in depressed shares of oil companies such as Suncor, only to enjoy the big rebound and exit those positions demonstrated a savviness that it never had before.

 

It seems to me, however, that complacency has set in. The last two years of robust oil pricing has fattened their coffers and artificially boosted (as in non-organic economic growth) their confidence. And they have started to return to their roots.

 

Neom city, a proposed mega-city to be situated on the beautiful Red Sea coast and built from scratch, was an ambitious project, but a well thought out investment with a very strong value proposition. But as this project evolved, something went wrong and the biggest White Elephant in the history of planet earth was conceptualized. 

 

They now want to built a 170km long "city" that is only 200 meters wide but half a kilometre high, with glass walls on the outside, where only public transportation exists and the whole project will be "net zero." What could possibly go wrong?

 

Take a look for yourselves: https://www.neom.com/en-us/regions/theline 

 

I've worked in the design engineering and construction industry in that region for over two decades. I can assure you that this project has ZERO chance of being executed. They have already started dredging at the coast and are excavating the length of the project so this is not just a fanciful concept. Real money is being thrown at it. Serious money. And the ball is only just starting to roll. Oh, and this is one of only half a dozen expected projects of such revolutionary magnitude. Two others have also been finalized and are in the 'construction' phase. The others are in the pipeline and will be announced over the next year or so.

 

By now some of you may have caught on to what I'm trying to say. But in case you have not, my point is very simple. Saudi Arabia is now the biggest crude oil put out there. They can't balance their state budget with the price of oil with an 8 handle on it, let alone one burdened with multiple White Elephants. 

 

Saudi Arabia will intervene before long with another supply cut unless the price of crude heads back up. I would even boldly predict that they will cut at the upcoming OPEC+ meeting, except that there are three factors that may prevent Saudi from cutting at this particular meeting.

 

1. Biden/MBS agreement. MBS is still seething with resentment at the US president, but it seems they have made some sort of deal. I won't speculate on what that is because there is zero evidence as to what it entails. It just seems like the timing of the immunity bestowed on MBS recently is out of place and Biden must have gotten something in return for it. Could be holding off on cutting further production. Whatever it is, its a risk to my prediction.

 

2. Russian price cap fallout. There is a possibility that the upcoming implementation of the cap will prompt crude futures to head higher. So far this isn't the case, and there is talk that the Europeans will not enforce it until late January anyway, as their game of chicken keeps getting kicked down the road. But things can change on a dime. Russia may decide to proactively cut production or deliveries given the agreement is passing imminently. In such a case, Saudi Arabia would not have to do anything as the price of oil will rise on its own.

 

3. Fundamentals alone carrying the price of crude higher going into winter is the third counter to my thesis. Lots of things happening that could prompt this. Expiration of the December futures contracts, end of shoulder season, holiday season ramp up, bigger draws in US due to reduced SPR releases, and so on.. 

 

Despite the three potential outcomes outlined above, I believe strongly that Saudi Arabia is more than willing to cut production, or at least exports, in order to prop up the price of oil. I would estimate the range at between 500,000 and 1m, closer to the former. And it doesn't have to be at the next OPEC meeting. In fact, if they do nothing at the meeting, it may cause the price of oil to dump or at least to remain relatively weak. And that will prompt Saudi Arabia to somehow announce a cut not long after the OPEC meeting assuming that they did not cut at the meeting. 

 

The White Elephant put is real. It is not palpable in the minds of industry analysts yet, and they may never attribute Saudi Arabia's actions to these mind boggling projects, but I am certain that this new batch of White Elephants is the equivalent of a gun to the heads of the decision makers who from now on will be aggressive about "balancing supply and demand."