Oil Market Sees Increased Conflict Risk in Saudi Power Shift

EEghtesadOnline: After Mohammed bin Salman’s appointment as crown prince, energy markets need to brace for an even more assertive Saudi Arabian foreign policy that could threaten regional stability in the heart of the global oil industry.

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23 June 2017

The 31-year-old has already supported the kingdom’s involvement in a war in Yemen and broken diplomatic ties with fellow OPEC member Qatar. Both moves were driven by a confrontational stance toward Iran, and MbS, as the prince is known, has already let the intensifying regional rivalry spill into oil policy -- last year, he intervened to sink a deal to freeze production because Iran refused to participate, according to Bloomberg.

Nonetheless, his government will need higher crude prices to push ahead with his plans to reform the kingdom’s economy, and that makes an immediate change in oil policy unlikely. In May, Saudi Arabia agreed with other members of the Organization of Petroleum Exporting Countries, including Iran, as well as producers outside the group to maintain output curbs into next year to shore up flagging prices.

The prince’s promotion “will likely mean minimal change to oil-production policy,” though it could lead to more aggressive foreign policy measures “that bring back the political risk premium” to crude prices, said Helima Croft, New York-based head of commodity strategy at RBC Capital Markets LLC and a former analyst at the Central Intelligence Agency.

Aramco IPO

Oil traders in London, Geneva and Dubai took a similar view, saying that even before his advance to first in line to the throne, MbS was already dictating the broader lines of Saudi energy policy. In particular, he helped negotiate an alliance with Russia, leading to its agreement last year to limit production.

“Even if there is a more aggressive foreign policy, we don’t see any changes to oil policy yet,” said Amrita Sen, chief oil analyst at consultant Energy Aspects Ltd. in London.

Still, energy policy poses considerable challenges: an oversupplied oil market, insufficient revenue to cover state spending and the ambitious project of seeing Saudi Aramco, the kingdom’s corporate crown jewel, through an initial public offering scheduled for next year.

Saudi Arabia, the biggest producer in OPEC, led the group’s decision in May to extend output cuts through March 2018 to counter a crude glut, but prices have fallen since. Oil dropped into a bear market this week as supply from countries outside the deal undermined efforts to rein in production.

Brent crude, the global benchmark that closed down 22 percent from its January peak on Wednesday, was little changed at $44.83 a barrel as of 10:57 a.m. in Singapore on Thursday.

Deeper Cuts

“Saudi oil policy will be business as usual, meaning that they will continue to look at supply imbalance in the market,” said John Sfakianakis, director of economics research at the Gulf Research Center in Riyadh. “If the situation requires a further cut or interference, the Saudis will consider taking further actions. Deepening the cuts of OPEC is now a very likely scenario if oil prices continue to tumble.”

Iran is talking with other OPEC members about possible further cuts in production, though the group would have a hard time reaching a consensus, the country’s Oil Minister Bijan Namdar Zanganeh said Wednesday on Iranian state radio.

Saudi Arabia earned $134.4 billion last year exporting its crude and refined oil products, down more than 60 percent from a peak of $337.5 billion in 2012, according to OPEC data. As oil revenues plunged, the kingdom tapped heavily its petro-dollar reserves, which have dropped below $500 billion for the first time in five years. Saudi Arabia’s net foreign exchange reserves peaked at nearly $750 billion in 2014 before oil prices crashed.

Regional Rivals

The prince, who is leading efforts to diversify the Saudi economy away from oil, is likely to exert his influence more immediately on the country’s policy toward regional rival Iran.

The two nations have vied for decades to play a dominant role in the Persian Gulf, and MbS said in a TV interview in May that he sees no common ground with Iran. Their differences worsened in April of last year, when OPEC and other oil producers failed in Doha reach a deal to freeze production after MbS, who was then deputy crown prince, insisted at the last minute that Iran join the agreement.

The kingdom accuses Iran of trying to destabilize Bahrain, a Saudi ally, and of supplying arms to Shiite rebels in neighboring Yemen. Saudi Arabia and Iran back opposing sides in the conflict in Syria, and when Riyadh severed ties with Qatar earlier this month, MbS was among those charging the smaller nation with cozying up to Iran and backing violent groups across the Middle East.

Economic pressure on Saudi Arabia is set to intensify as the state spends at home and abroad. King Salman on Wednesday retroactively reinstated all allowances and bonuses that were canceled or suspended to civil servants and military personnel, the Saudi Press Agency reported, tightening a financial squeeze on the government made worse by this year’s 19 percent slide in the price of benchmark Brent crude.

“We should be prepared for Saudi Arabia to do whatever it takes to keep the prices above $50 a barrel,” including further cuts in production, consultant FGE said in a research note.