Following the biggest news of this weekend, the (anticipated) resignation/termination of Saudi Arabia's longstanding oil minister Ali al-Naimi, everyone has been wondering about what comes next and how this development will impact the price of oil. We laid out our preliminary thoughts as follows:
Ultimately this is not about the new oil minister: this is about Prince Mohammed taking full control over Saudi oil. So the question everyone now wants answered is "what does this mean for oil?"
While nobody knows the answer, what is clear is that over the past 2 months, Prince Mohammed has had a far more hawkish outlook on oil prices. [I]t was Mohammed who effectively scuttled the Doha oil deal which was "this close" to reaching a conclusion before a last minute collapse as the crown prince intervened, overriding al Naimi's proposal.
Furthermore, as the FT reported at the time, "there were other signs that Saudi Arabia’s oil ministry was preparing for a deal. Between January and March the country held its oil output at around 10.2m barrels per day — a level consistent with the proposed freeze." Then a few weeks ago, Prince Mohammed once again poured cold water over any expectations that Saudi Arabia would permit higher oil prices when he said last week said "the country’s production could immediately rise to 11.5m b/d — if there was demand."
In other words, on the margin al Naimi's termination and Prince Mohammed's official ascent to the top of the Saudi oil chain of command are likely bearish in the short term, as Saudi Arabia reverts to its 2014 strategy of pushing oil prices low enough to put marginal producers out of business, a process that due to relentless hedging and generous banks, has taken way too long.
In summary, it is likely the slow fruition of Saudi plans to put high cost producers out of business, coupled with Saudi Arabia's own economic deterioration that forced the king to take this drastic measure.
Shortly thereafter, one of the few energy market strategists we pay attention to, Reuters' John Kemp, proceeded to tweet his thoughts on the matter of Saudi oil "succession", in what effectively was a repeat of our own conclusion (start at the bottom), and where the most notable observation is that "if anything dep crown prince has pursued an even more hawkish line to use oil weapon in broader struggle with Iran":
Still, speculation is just that, and the market will be driven by any official statement out of Saudi Arabia and its new oil minister, Khalid al-Falih. One day after the surprising power shift, made his first official statement saying that Saudi Arabia was "committed to meeting demand for hydrocarbons from its customers and would maintain its petroleum policies." From Reuters:
"Saudi Arabia will maintain its stable petroleum policies. We remain committed to maintaining our role in international energy markets and strengthening our position as the world's most reliable supplier of energy," Khalid al-Falih said in an e-mailed statement.
"We are committed to meeting existing and additional hydrocarbons demand from our expanding global customer base, backed by our current maximum sustainable capacity."
As Reuters summarizes, Falih's comments on Sunday support analysts' views that no shift in Saudi oil policy is likely as a result of his appointment, however the emphasis on maximum sustainable capacity once again hints that any incremental increase in global demand will be promptly met by a boost in Saudi output, just as the deputy crown prince bin Salman said would happen in his BLoomberg interview one month ago.
Some other observations came from Dow Jones, which points out that as al-Naimi departs his job, "the kingdom's crown as top crude supplier to Asia. home to some the world's biggest and fastest-growing oil consumers, is slipping" something we first discussed several weeks ago. "Stiffening competition from countries such as Russia and Iran is threatening Saudi Arabia's longtime hold over markets including China, Japan and India."
Those competitive forces, intensified by the nearly two-year slump in oil prices, underscore the challenges Mr. Naimi faced during his final years as oil minister. Mr. Naimi was dismissed Saturday, replaced by Khalid al-Falih, chairman of state oil company Saudi Aramco.
Analysts say Mr. Falih is likely to follow Mr. Naimi's policy of trying to safeguard Saudi Arabia's market share, even if it means contributing to the world's continuing supply glut. Saudi Arabia has faced pressure from smaller OPEC members to cut its production since oil prices started tumbling in mid-2014.
"Khalid Al-Falih believes in the policy implemented by Al-Naimi and does not see the need for Saudi Arabia to intervene to balance the market," analysts at the research firm Energy Aspects wrote in a report Saturday. Mr. Falih "has made his opposition to unilateral cuts or freezing of production very clear," they wrote.
In other words, more of the same even as the Saudi policy of keeping its production high has had mixed success in Asia. Asian refiners still source the bulk of their oil from Middle Eastern producers, often on long-term contracts that are already in place. China, the region's biggest oil importer, still gets more of its crude from Saudi Arabia than anywhere else, although its reliance on Russia has been surging in recent months forcing Saudis to recently deliver oil at spot prices.
But while China's oil imports grew 13.4% year-over-year to 7.3 million barrels a day in the first quarter of 2016, its imports from Saudi Arabia grew just 7.3%, customs data show. The kingdom's share of Chinese imports fell to 15% from 15.9%.
Meanwhile, Chinese oil imports from Russia surged 42% in the first quarter of 2016, accounting for 13% of the total in the quarter, up from 10.6% in the same period the previous year.
In other words, if the Saudis want to regain Chinese market share from the Russians, they may well have no choice but to either aggressively boost production or cut prices, or both, once again.
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In another report, the WSJ confirmed precisely what we said yesterday when it wrote that the dismissal of Ali al-Naimi as Saudi Arabia's oil minister "puts the country's deputy crown prince firmly in control of energy policy and makes it less likely the Organization of the Petroleum Exporting Countries will change tactics next month, OPEC officials said."
Prince Mohammed bin Salman, second-in-line to the throne, has taken a hard line on Saudi oil policy, doubling down on the kingdom's strategy of maintaining high crude output in the face of collapsed prices. OPEC officials said the appointment of a new minister, Khalid al-Falih, makes it unlikely that Saudi Arabia will advocate changing policy with OPEC, the 13-nation cartel that controls a third of the world's oil production.
It could still be a long and fractious meeting when OPEC convenes on June 2. Some members want to pull back or freeze the cartel's output, while Saudi rival Iran is intent on throttling its own production up now that Western sanctions on its nuclear program have ended.
"Naimi knows OPEC and OPEC knows him and any change will present another problem for OPEC ministers," said John Hall, chairman of Alfa Energy and a longtime OPEC watcher. "To understand the new direction that will undoubtedly arise from the new leadership of the Saudi ministry will take time." Mr. Falih is an experienced oil executive, leading the state oil company for years, but he hasn't attended an OPEC meeting and doesn't have the long-term relationships with other countries that Mr. Naimi did.
Mr. Falih will have to navigate a landscape of increased competition from Iran, Saudi Arabia's main rival for power and influence in the Middle East. Freed from Western sanctions, Iran has embarked on a campaign to grab back customers it lost to Saudi Arabia and others, in both crude-oil markets and petroleum products like chemicals, Tehran officials said.
In his first remarks as minister, Mr. Falih on Sunday said in a news release that the country would "remain committed to maintaining our role in international energy markets and strengthening our position as the world's most reliable supplier of energy."
Mr. Falih moves into his new job as Riyadh and Tehran are at odds diplomatically, backing opposing sides in the violent conflicts in Yemen and Syria, and representing different strains of Islam--Sunnism in Saudi Arabia and Shiism in Iran. Riyadh cut off ties with Tehran this year after some of its diplomatic buildings in Iran were ransacked by protesters following the execution of a popular Shiite cleric in Saudi Arabia.
Our assessment based on all the latest news is that the Saudi strategy of attempting to put high-cost, marginal producers, whether in (Venezuela) or out of OPEC (US shale) will accelerate, especially as Saudi's sworn nemesis, Iran, pushes its own output higher month after month.
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As we reported yesterday, Falih's appointment was part of a bigger Saudi shake-up announced on Saturday as King Salman restructured some big ministries in a major reshuffle intended to support a wide-ranging economic reform program. As part of the restructuring, the Petroleum Ministry has been renamed the Ministry of Energy, Industry and Mineral Resources. Additionally, the water and electricity ministry was abolished and its responsibilities split. The energy ministry will now oversee activities related to electricity.
"The creation of a new Ministry in Saudi Arabia that brings together the Kingdom's abundant and unrivalled energy and mineral resources and industrial capabilities is in line with the ambitious objectives of Saudi Vision 2030," Falih said.
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Finally, while we wait to see how US oil futures will react to the Saudi news, local Saudi equity markets took the news in stride. On Sunday, the Saudi stock index closed 0.2% higher after rising as much as 1.0% at one stage. Petrochemical blue chip Saudi Basic Industries gained 0.3%. State utility Saudi Electric climbed 1.8%.