Saudi oil policy back in focus after King Abdullah’s death
Crude prices pared their earlier gains on Friday after the death of Saudi Arabia’s King Abdullah placed renewed focus on the kingdom’s oil policy.
Ice March Brent, the international oil marker, rose 42 cents to $48.94 a barrel in afternoon trading after almost hitting $50 a barrel. Its US counterpart Nymex March West Texas Intermediate dipped 40 cents to $45.90 a barrel, having reached close to $48.
Opec’s largest producer and de facto leader persuaded the cartel’s members in November to hold production at 30m barrels a day in an effort to defend market share. The decision came despite calls from poorer Opec nations for output cuts to shore up prices, which had been dropping since mid-June and have halved in the past year.
Oil prices rose initially on Friday as some investors bet on a change in strategy, but others have said it was unlikely that Saudi Arabia would backtrack, particularly in the near term. As that view prevailed, oil prices retreated.
“Change now can create a lot of uncertainty,” said one oil trader, who added that he believed Ali al-Naimi, Saudi Arabia’s oil minister, would “see his policy through”.
King Abdullah has been succeeded by Salman bin Abdulaziz, the crown prince. In an effort to ensure stability, the new monarch, who is 79, quickly named his own successor — Muqrin bin Abdulaziz, who is in his late sixties.
Analysts said King Salman was likely to stand by the strategy of allowing market forces to determine the oil price and weed out high-cost producers.
“We expect the Saudi oil policy to remain consistent under King Salman. While it would be within his power to make dramatic changes and reverse the current policy, there are no indications at present that he might do so,” said Richard Mallinson, an analyst at Energy Aspects, a consultancy.
John Sfakianakis, Middle East director for Ashmore Group and former chief economic adviser to the Saudi finance minister, echoed this statement. The kingdom, he said, sets policies with a long-term view and makes changes very slowly.
“Saudi is adamant that they will maintain market share. If they change tack now it would show a lack of consistency,” said Riyadh-based Mr Sfakianakis. “If a leadership change meant a policy change, it would show that policy is dictated not by the technocratic class but the political class.”
Before his death King Abdullah said he would tackle the challenges presented by the oil price rout “with a firm will”, according to a speech read on his behalf by his successor and broadcast on state television. Oil market observers believe the new king to be already involved in policy decision-making.
Saudi Arabia has 16 per cent of the world’s proven oil reserves and is the biggest exporter of petroleum liquids in the world, according to the US Energy Information Administration. It maintains the world’s largest crude oil output capacity, meaning it is considered to be the most important oil producer in the world.
Market watchers have said that the death of King Abdullah would focus attention on Mr Naimi, who has been driving decision-making on oil policy in the kingdom since 1995. Mr Naimi is almost 80 and has previously asked to retire.
Mr Mallinson said: “We believe a change is now more likely within the next 18 months, but Naimi may first want to see through the current policy. Any change at this time may create uncertainty in the oil market, which Saudi Arabia would like to avoid.”
Some observers have pointed to Prince Abdulaziz, assistant oil minister and son of King Salman, as his possible successor.
“Prince Abdulaziz will be interesting to watch,” said Simon Henderson, director of the Gulf and Energy Policy programme at The Washington Institute think-tank. “Will he be satisfied to remain in a secondary role or does he have ambition to go for the top job, particularly now that his father is king?”
But traditionally Saudi oil ministers have been non-royal technocrats such as Mr Naimi. This suggests the most likely successor is Khalid al-Falih, the chief executive of Saudi Aramco, said Mr Mallinson.
Mr al-Falih appears to support current Saudi oil policy. He told the World Economic Forum in Davos this week that years of high oil prices, “propped up by geopolitics”, had driven the boom in unconventional supply. He also said the collapse in oil prices would make investors wary of committing large sums to the oil and gas industry.
But the new king has to face a challenging economic landscape due to the dramatic fall in the price of oil and the country’s “political imperative” to maintain spending on social programmes, said Helima Croft, head of commodity strategy at RBC Capital Markets.
“Instead of belt-tightening in the face of eroding oil prices, the Saudi government has opted for a record high level of spending, with large official outlays for education, health, and infrastructure projects,” she said.
Although Saudi Arabia has a huge $750bn war chest to withstand the oil price plunge, the International Monetary Fund has urged Gulf oil exporters to curb spending on wages and reduce subsidies.