Saudi Arabia’s royal reshuffle: Bullish or bearish for oil?
Saudi Arabia has a new crown prince, the 31-year-old Mohammed bin Salman, it emerged last week.
The promotion of Prince Mohammed bin Salman comes at a time when all the financial gauges for oil are bearish, and many hedge funds and speculators are cutting their bullish bets on prices.
As soon as the news of his promotion came out, many analysts turned bullish and started to talk about the return of geopolitical risks to the oil markets. This in part has to do with Crown Prince Mohammed bin Salman’s stance on Iran and Qatar, two neighboring oil-producing countries that also happen to be fellow members of the Organization of the Petroleum Exporting Countries (OPEC).
Despite this, the oil market seems to be indifferent about the geopolitical discourse as there is already too much oil in the market, which OPEC and its allies are still struggling with. The situation in the market last week saw speculators cut their net-long position in US benchmark futures to the lowest in 10 months, and in North Sea Brent to the lowest since January 2016, as exchange data from London and New York showed on June 26.
Speculators do not seem to worry much over adding a few dollars of risk premium to prices. However, it is highly important to understand how Crown Prince Mohammed will reshape the global energy market.
The crown prince is on a mission to end his country’s dependence on oil as the main source of state revenues. Yet this does not mean he does not need oil.
In fact, his plan to free his country from its addiction to oil is resting on selling a stake in the national oil company, Saudi Aramco, to the public. This sale will require oil prices to be at a good level to fetch a higher valuation for the company. It will equally need a stable oil market and a stable Middle East region so that investors will feel comfortable holding shares for years to come.
Saudi Aramco’s sale process is central to the crown prince’s short-term oil policies. And higher oil prices are needed for the initial public offering (IPO) of the company more than they are needed for the state’s budget.
In an interview with Al Arabiya and Saudi TV in May, the prince said: “As you know, in the fiscal balance program there were three scenarios of oil prices: Low (pessimist) $45, medium (average) $50 and high (optimist) $55.” Seemingly, the country is already building its fiscal budget on more than one scenario and the likelihood of “lower for longer” is already factored in.
A stable oil market also means cooperation with other producers inside and outside of OPEC. Crown Prince Mohammed bin Salman understands this factor very well and it can be seen in his recent statements.
In the same interview, he acknowledged that the current production cut agreement between OPEC and non-OPEC countries “is what enhanced our position and made it very positive on the level of the government’s oil revenues.”
As the IPO process of Saudi Aramco marches forward, more cooperation is expected as Saudi Arabia discovered that it and its OPEC members could no longer do the re-balancing job of the global oil market alone.
The prince even said that going forward, Saudi Aramco’s production policies after the IPO would be set in coordination with others. The policies will be “governed by supply and demand and coordination with OPEC and non-OPEC countries in order to coordinate the quantity of supply and demand so there is no collapse or confusion in oil prices,” he told Al Arabiya.
Now, there are still geopolitical risks due to Saudi Arabia’s assertive foreign policy in the region and the current situation with Iran in Yemen, Syria and elsewhere. Also, no one knows how Qatar’s crisis will unfold. But these risks will not deter Saudi Arabia from pursuing its long-term goal of moving the economy away from oil.
The crown prince is decisive and very focused on achieving his goals. In April last year, he could not reach a deal with Iran over freezing production. A few months later, he met with Russian President Vladimir Putin in China and they laid the foundation for the current alliance. OPEC has been in harmony since then, even as the rift with Iran is still widening.
So the real challenge for the crown prince is not in having high oil prices, but it is in keeping politics away from oil. So far he has done a good job and this is good news for market bulls, as they should expect Saudi Arabia “to do whatever it takes” to balance the oil market.
• Wael Mahdi is an energy reporter specializing on OPEC and a co-author of “OPEC in a Shale Oil World: Where to Next?” He can be reached on Twitter @waelmahdi