With $350 billion accord, Trump and Saudi Arabia's millennial prince master the art of the deal
With $350 billion accord, Trump and Saudi Arabia's millennial prince master the art of the deal ·CNBC
Patti Domm
Updated
President Donald Trump's visit to Saudi Arabia could be a boost for the big ambitions of Saudi Arabia's young deputy crown prince, who is trying to steer the kingdom's fortunes away from oil.
For Mohammed bin Salman, the U.S. brings an arms deal worth $350 billion over a decade, while affirming its decades long support as Saudi Arabia's regional power struggle with Iran intensifies. For Trump, it's a reset of what was a less friendly U.S.-Saudi relationship under President Barack Obama, and a show of Saudi support for the U.S. in the fight against ISIS.
"I think Trump will relish spending time in a country that is absolutely thrilled with his election. MBS will be looking for assurances that we will work alongside the Kingdom in rolling back Iran's regional ambitions," said Helima Croft, head of global commodities strategy at RBC.
Bin Salman's Vision 2030 will get U.S. endorsement on his home turf. The 31-year old son of King Salman, known as MBS, is behind the program aimed at transforming Saudi Arabia into a more diverse economy. As part of that arrangement, Softbank announced on Saturday that it had pulled in $93 billion in committed capital for a planned technology fund, fueled in large part by Saudi investment.
His longer term plan is to create thousands of jobs in industries, such as tourism and technology. The program also includes the funding of a giant sovereign wealth fund, with the proceeds of the the IPO of state oil company Saudi Aramco, expected sometime next year.
"Vision 2030 is the signature initiative of MBS, but it is facing quiet opposition at home and disbelief in international financial circles. Trump's support in the White House statement for it when MBS was in D.C. were helpful to MBS. He is likely to mention it again this time. Such support also helps MBS in his ambition to be the new face of Saudi Arabia. But succession politics in the royal family are complicated, so the U.S. needs to be cautious," said Simon Henderson, Baker fellow at The Washington Institute and director of the Institute's Gulf and Energy Policy Program.
Trump also visits Saudi Arabia just ahead of Thursday's OPEC meeting where the kingdom will lead the cartel in a decision on extending its production cuts. Saudi Arabia has suggested production cuts lasting nine month instead of six months as previously expected. There also was talk that OPEC is considering expanding the current 1.8 million barrels a day cut, but it's not clear whether there would be support for that.
"We're talking about the biggest oil consumer and the biggest oil exporter in the world, so any kind of rhetoric or change in the relationship has an impact on the industry, not necessarily the price but the relationship," said Michael Cohen, head of energy commodities research at Barclays.
Saudi Arabia, other OPEC members, and non OPEC producers like Russia, are hoping to extend their production deal, in a bid to push up the price of oil. Due to U.S. surpluses and new output from Libya, oil prices have been soft lately and were just edging back above $50 per barrel on Friday. The fact that U.S. oil production has been relentlessly rising, as Saudis and others cut back is not likely to be discussed.
"I think it's very unlikely that we would see that as a Saudi talking point: 'Tell your frackers to cool off.' That's not something I would expect to see. This is a very high level strategic dialogue that's been underway and it started with Mohammed bin Salman's visit to D.C. a couple months ago," Cohen said.
Cohen said there could be economic benefits both ways. "It's important in terms of whether we see the Saudi Aramco IPO listing in New York. It's important for Saudi Arabia's national transformation plan, Vision 2030, and there's a lot of U.S. companies that are are already investing in a big way in Saudi Arabia. The extent to which this meeting will enhance those already existing relationships between companies like Dow Chemical (NYSE: DOW) and GE (NYSE: GE), it will make a difference to the investment community," he said. Dow Chemical's CEO was traveling to Saudi Arabia with Trump.
Saudi Arabia has also said it would make investments in the U.S., in energy and other industries.
"When he was in Washington, both sides made mention of Vision 2030 in their sort of comments on the meeting, and it seems as if the Saudis said to the Americans, 'We will invest in the United States and create American jobs, and we would also like your support for helping us economically transform the country,' so there is a mutual agreement to work together on this," said Henderson. "The details of which we don't know, but there's also a basic logic for the Saudis to transform their economy. They need to invest a lot of money at home."
Henderson said Saudi Arabia wants to further develop its relationship with the U.S. politically and militarily.
"If it requires them to make some investments to develop an economic component, then they'll do that. It's not necessarily a sensible use of their money, but rather a sort of lever to be able to engage with the U.S. government," he said.
