Saving oil prices: All eyes on Saudi Arabia’s new king

Oil prices jumped in Asian trading as news of the death of Saudi Arabia’s King Abdullah added to uncertainty in energy markets already facing some of the biggest shifts in decades. Futures climbed as much as 2.6 percent in London and 3.1 percent in New York after the Saudi royal court announced the death in a statement. Brent crude for March settlement advanced as much as $1.28 to $49.80/bbl on the ICE Futures Europe exchange and traded for $49.55/bbl.

The Saudi King’s death comes amid some of the biggest shifts in oil markets in decades. Oil has slumped by over 60 percent since June 2014 and 37 percent since the OPEC November 27 accord to maintain production at 30 MMbopd as soaring supplies clash with cooling demand, due to economic slowdown in Europe and Asia as well as improvements in energy efficiency, made during times of high prices. Booming US shale production has turned the US from the world’s biggest oil importer into the biggest producer, producing more than 9 million barrel per day.

King Abdullah oversaw a fivefold expansion in the size of the Arab world’s biggest economy and met the Arab Spring with a mixture of force and largesse.

Saudi policies won’t change

To combat soaring output and falling prices, many oil exporters, such as Venezuela, wanted OPEC to cut output in order to support prices and revenues. Yet, led by Saudi Arabia, OPEC announced last November it was keeping output steady at 30 million bpd.

Brent, which had already fallen to $77 per barrel by the time of the OPEC meeting, dropped another quarter over the next month as the market digested the fact OPEC would not come to the rescue. OPEC’s decision not to act, led by Saudi Arabia, was aimed at defending market share against US shale producers as well as other non-OPEC exporters such as Brazil or Russia.

It is believed that the late King Abdullah was the architect of the current strategy to keep production high and force out smaller players instead of cutting output. Saudi Arabia’s oil strategy is likely to remain unchanged as King Salman assumes power, according to Bank of America. Crown Prince Salman bin Abdulaziz, who succeeds Abdullah on the throne, said he would maintain his predecessor’s policies. He has a reputation as a defender of Saudi Arabia’s interests and that the market would expect him to keep production high to safeguard the kingdom’s market share despite faltering oil prices.

Nigeria, other OPEC members face unique challenges

At sub-$50 per barrels, it remains to be seen how Nigeria’s government will cope at the $65 benchmark for the budget. Already, the federal government has gone borrowing in its latest bid to meet the first quarter operations. The money acquired through the sale of sovereign bonds worth N72 billion at a nominal interest rate of 15.48 percent.

Iraq has reportedly lost approximately 50 percent of its revenues from oil exports and has consequently had to boost output to record levels just to stay afloat.  This move saw OPEC’s overall output rise by 80,000 barrels a day last month reaching a total of 30.48 million, with the drop off in Libyan supply being covered by Iraq.  While some stability has returned to Iraq following a deal with the Kurdistan Regional Government, the loss of oil revenues threatens the Iraqi oil industry’s long-term survival and ability to maintain capacity at such high levels.

Amidst allegations of illegally falsifying Iranian exports as Iraqi by switching ship cargoes off the coast of the United Arab Emirates, Iran is also facing further pressure on its exports from one key trading partner: India.  India’s government has asked refiners to cut import numbers from Iran for the next two months in order to maintain year-on-year levels in adherence to the sanctions imposed against Iran.  Given that India is Iran’s second largest buyer of crude oil, and with oil prices currently hovering around $46, the timing could not be worse as Iran tries to play nice with the West ahead of further talks regarding the development of its civilian nuclear program.

Venezuela is feeling the oil price pressure more than most with the price of Venezuelan crude dropping by almost 7.7 percent to $39.19 per barrel. With oil revenues reaching six year lows, President Maduro has asked lawmakers to consider ending the 18-year gasoline price freeze as the Venezuelan economy veers ever-closer to recession and default. 

Saudi oil minister to remain

Oil Minister Ali Al-Naimi, who led OPEC’s November decision to defend market share against surging US shale supplies, remains in his post according to state-run Saudi Press Agency. Traditionally, incoming kings have opted to appoint new ministers to key ministries such as oil and finance.  While Al-Naimi has expressed his desire to retire soon, this is not expected until sometime after the June meeting of OPEC, a key catalyst for oil price recovery in 2015.

Saudi Arabia’s new King Salman was quick to keep the veteran oil minister Ali al-Naimi aimed at calming a jittery energy market mindful of Naimi’s powerful role within the OPEC group of oil-exporting countries. Ali Naimi said last month that Saudi Arabia will not lower its massive output of 9.5 million barrels a day to prop up the oil market, even if the price crashed to $20 a barrel.

The International Energy Agency (IEA) sees no major policy changes under Salman. However, if Naimi decides to retire because of old age, few expect any changes, since major energy decisions are made by the Supreme Petroleum Council, which is headed by the king and made up of senior members of the royal family and several key ministers.

The 79-year-old Naimi has been a leading figure in the market for two decades and successfully argued in November that OPEC should hold output steady despite a sharp fall in oil prices in order to safeguard market share. With Naimi to stay for now, analysts said the focus was on for how long, as his departure could impact Saudi policy, OPEC and oil prices generally.

Saudi Arabia is well prepared to endure a prolonged downturn thanks to huge windfalls from high oil prices since 2011, that has enabled it to amass foreign reserves of about $750 billion.

The new king, Salman

King Salman, 79, was governor of Riyadh Province for 48 years before becoming defense minister in 2011 and crown prince a year later. He has been effectively running the country in the past year by taking on the duties of the king as Abdullah’s health deteriorated. Salman moved quickly to ensure smooth succession by appointing his half-brother, Prince Muqrin, as the new crown prince.

At present, the Saudi budget, which depends on petroleum exports for 85 percent of its annual revenues, balances at around $63 a barrel.  With prices hovering around $46 and many predicting a prolonged period of depressed prices, Saudi Arabia will be forced to dip into to its $800 billion dollar cash reserves to handle the largest deficit in its history of $38.6 billion.

FRANK UZUEGBUNAM