16 December 2017

Death of King Unlikely to Alter Saudi Oil Policy

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The death of Saudi King Abdullah bin Abdulaziz al Saud comes at a critical point for the kingdom’s oil policy. The WSJ's Andrew Peaple examines what oil watchers are looking for. Saudi Arabia has charted a long-term course to drive down oil prices and maintain its major share of the global market—and a change of who is on the throne in Riyadh won’t likely alter this course.

Even after the death of King Abdullah, announced early Friday, the kingdom is likely to continue to pump crude in the face of a global glut, which has helped push prices down by more than 55% since last June. Surrounded by unrest and uncertainty in the Middle East, Saudi Arabia is protecting itself by exploiting its big advantages—huge oil reserves and low-cost crude production, said Sarah Emerson, principal of ESAI Energy LLC in Boston.

Investors who had bet on lower prices likely closed out positions on the chance that the king’s death could lead to a change in Saudi Arabia’s stance, said Nader Naeimi, a fund manager in Sydney, at AMP Capital, which oversees more than $120 billion in assets. Some investors don’t think the new Saudi king will affect the policy of the Organization of the Petroleum Exporting Countries.

The country’s current strategy has the backing of its powerful oil minister, Ali al-Naimi, so investors and traders will be watching for the possibility that a change of oil ministers could be afoot. Some Saudi experts say it is unclear if the behind-the-scenes power struggle over who has influence over King Salman is finished and whether the kingdom’s princes have coalesced around him.

Mr. al-Naimi, 79, has headed the oil ministry since 1995, during which time he has become one of the most closely watched figures in global oil markets. He has previously said he had hoped he could dedicate more time to King Abdullah University of Science and Technology, where he serves as chairman.

King Salman, in his previous capacity as crown prince, said in a speech on behalf of the late monarch earlier this month that the kingdom would continue to deal with the challenge posed by falling crude prices with a “firm will”.

Saudi industry officials have said that King Salman is likely to retain the long-standing oil minister at least in the short term. Traditionally incoming kings have chosen to appoint new ministers to lead key ministries like oil. If the king opts for finding a successor the best-suited candidates to replace him are likely to be the chief executive of the state-owned giant Saudi Aramco Khalid Al-Falih or Salam’s own son Prince Abdulaziz bin Salman, the current deputy oil minister who attends most OPEC meetings.

In early October, the country’s representative to OPEC surprised attendees at a New York seminar by revealing his government was content to let global energy prices slide. But as the oil-price slide accelerated, Prince Abdulaziz worried to colleagues that the kingdom’s budget couldn’t bear lower prices long, people familiar with the matter said.

Saudi Arabia controls more than 15% of the world’s proven oil reserves and vies with Russia and the U.S. for the title of biggest petroleum producer in the world. As American companies have pumped soaring amounts of oil from shale, Saudi Arabia’s exports to the U.S. have fallen, dropping to 25.6 million barrels a month in October. But it remained the third-largest supplier to the U.S. after Canada and Mexico, according to the U.S. Energy Information Administration.

After oil prices began dropping from their triple-digit peak in late June, traders looked to Saudi Arabia to cut production to prop up prices, as it did in the 1980s. But in November, the Organization of the Petroleum Exporting Countries voted to keep pumping the same amount of oil, and that isn’t likely to change soon, said Amy Myers Jaffe, an energy observer at the University of California Davis.

Click here to access the full article on The Wall Street Journal. 

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