The death of King Abdullah bin Abdulaziz on January 23 has led to speculation that a leadership change in Saudi Arabia could result in a shift in the country’s oil policy.
In recent months, the Organization of Petroleum Exporting Countries (OPEC) has opted to continue pumping oil in a bid to defend market share rather than cut production and bolster prices. As Saudi Arabia has been the force behind this decision, some wondered whether, in the aftermath of the change at the top in Riyadh, Saudi Arabia would reverse its policy of insisting on market share.
And while news of the king’s death sparked a rally in the price of oil – the benchmark U.S. crude futures contract rose more than $2 a barrel in the hours after the king’s death – the spike was only temporary because it had nothing to do with fundamentals. Prices quickly slipped back as investors bet that a change in Saudi Arabia’s leadership was unlikely to alter the kingdom’s oil-market policy.
The U.S. oil benchmark, which had risen as much as 3.1% in overnight trading, turned negative during the morning session and fell 21 cents, or 0.4%, to $46.10 a barrel on the New York Mercantile Exchange.
The smooth transition to King Salman’s reign helped stabilize markets, with his rapid moves to appoint the crown prince and the second crown prince helping clear the air. He also underlined his commitment to continuing with Saudi Arabia’s current oil policy, making it clear that stability would be the hallmark of his reign. “We will,” he said in a speech broadcast on state television, “with God’s support, maintain the straight path that this country has advanced on since its establishment by the late King Abdulaziz.”
Any air of uncertainty over the future price of oil soon began to disappear.
“There is no tangible evidence to suggest that Saudi Arabia will veer away from existing policy of keeping oil output steady in the face of growing U.S. shale oil supply,” said Harry Tchilinguirian, head of commodity markets strategy at BNP Paribas SA.
“There’s still an overwhelming glut of supply in global markets,” Stephen Schork, president of Schork Group in Villanova, Pennsylvania, told the press. “Certainly this death matters but it doesn’t fundamentally change anything. The Saudis are trying to preserve market share and have been quite clear about that.”
Further cementing Salman’s position on maintaining current policy was his continuing support for veteran oil minister Ali al-Naimi. As the architect of the kingdom’s current crude policy, any hint about Naimi’s possible departure would have been a source of uneasiness in the markets. “Naimi is a market-calming voice, and very well respected,” Frank Verrastro, of the Center for Strategic and International Studies, said. “Naimi will likely stay on during this period of uncertainty.”
All of these moves have led most analysts to reach the conclusion that there would not be any major change in the kingdom’s oil policy, or a reduction in production, any time soon. “There will be no change in Saudi’s policy whatsoever,” Julian Jessop, global chief economist at Capital Economics, was quoted as saying.
According to Prince Al-Waleed bin Talal, chairman of Kingdom Holding Co., Saudi Arabia is not going to be the first to blink in the continuing battle for market share. While admitting that Saudi Arabia, which derives 90% of its budget from oil, is feeling the pain of the price collapse, he told CNBC, “Eventually there’s no doubt that some countries have to blink and reduce their production. ... [But] I don’t see Saudi Arabia or the OPEC countries blinking.”
So, despite the change at the top in Riyadh, crude markets will continue to be faced with weak fundamentals for some time to come. Prices could be in for some more battering in the coming weeks. The transition at the top in Saudi Arabia is not going to make much difference, as far as Saudi oil policies are concerned.
Rashid Husain Syed is an energy analyst and a widely published expert on global energy affairs. This commentary is reprinted courtesy of Troy Media.
