Burgess COMMENTARY

Peter Burgess

What The Death Of Saudi King Abdullah Really Means For Oil Prices ... Crude Gives Up Knee-Jerk Gains

Late Thursday, as the world began to mourn the death of of Saudi Arabia's King Abdullah bin Abdulaziz, we noted that West Texas Intermediate futures spiked by as much as 3.1% following the announcement.

The Late Saudi Monarch

But as of this morning, those gains had been pared, and WTI is slightly lower on the session ($46.25, -$0.05 as of this writing). Brent exhibited a similar spike and fade, but was holding onto modest gains this morning.

It appears that the brief spike in prices was a knee-jerk reaction rather than valid anticipation of a meaningful policy change or disruption in Saudi production. Concerns over instability caused by Saudi's leadership transition were the primary culprit for the spike in prices. Uncertainty can create noise in market pricing, but this morning that uncertainty was quickly stamped out.

No Change To Oil Market Policy

King Abdullah's successor, former Crown Prince Salman bin Abdulaziz (79), stated that he would maintain the policies of his predecessor.

Soon after assuming the throne, the official Saudi Press Agency reported that King Salman promulgated a royal decree to keep current ministers. This includes Saudi Oil Minister Al-Naimi who serves as the voice of OPEC's largest producer. It was he who was largely responsible for the group's decision in late November to maintain its 30 M/bd production quota, which drove oil prices lower.

Because Saudi's oil policy is set by a group of the Kingdom's political leaders and energy experts, it is unlikely that its long-term, market share-focused energy policy will be abandoned simply because of the late-monarch's passing.

In an email exchange with Oilpro, Sadad al-Husseini, a former executive vice president and board member of Saudi Aramco, said 'The current Saudi oil policy was prepared carefully by the Ministry of Petroleum, and when HM king Salman addressed the Saudi Consultative Council about two weeks ago he stressed that the Kingdom would be firm in supporting this policy.'

Mr. Husseini, who currently heads Husseini Energy, an oil and gas consulting firm, continued, 'I doubt that there would be any change at all at this time unless global supplies begin to decline in line with Opec expectations,' he continued in the email exchange.

'Based on those facts our consultancy sees no reason to expect any lasting market developments through the first half of 2015 but we're tracking the many other variables that could become significant beyond oil supply and demand issues,' he said.

With production of 9.5 M/bd and exports of 7 M/bd, Saudi Arabia is responsible for more than a one-tenth of global supply and one-fifth of oil sold globally.

The Royal Kingdom's refusal to surrender market share to increasing US unconventional production has contributed to the worst drop in oil prices since the global financial crisis of 2008.

So What Does The Passing Of King Abdullah & The Accession Of King Salman Mean for Oil Prices?

What does the passing of the monarch overseeing the world's largest oil producer really mean for oil prices? In the short term, probably not much - the new king will stick to the same oil policy as before, and the leadership transition is unlikely to destabilize the country in the slightest. Initial hopes in the market that the transition would lead to higher oil prices have been quashed.

However, uncertainty remains. The 79-year-old King Salman is reportedly in poor health and suffering dementia, which raises the possibility of a shorter term. If there is a power struggle to succeed him, a power vacuum could be created in the Middle East at a very challenging time for the Royal Kingdom.

Simon Henderson, an expert on the Saudi succession at the Washington Institute for Near East Policy, told the Washington Post, 'Despite so many people saying it will be a smooth transition, there’s every reason to believe that Saudi Arabia is heading for rough times...Having a king with dementia is the last thing they need at this difficult time Yemen is falling apart, ISIS is knocking at the door . . . this is an extraordinarily dangerous Middle East from a Saudi perspective.'

However, at present, the passing of King Abdullah and the accession of King Salman will see the maintenance of the same oil policy as before. Which, as we wrote above, means that the brief spike in oil prices on Thursday was for now just that- a spike.