Published on February 3, 2015
King Abdullah Bin Abdulaziz’s death was not taken well by the oil market and oil prices reacted immediately to the news of the death of the Saudi king.
King Abdullah passed away in the early hours of Friday, which led to widespread speculation that a change in leadership could also lead to a change in the country’s oil policy. Recently, OPEC announced its decision to not cut production in order to safeguard its market share, and Saudi Arabia is believed to be the major force behind this decision. Thus, the question that arose was whether Saudi Arabia would change its policy following a leadership transition.
Oil prices fell further on Thursday, before the death of the King as a result of European Central Bank’s decision to announce a €1.1 trillion bond-buying program. However, the news of the King’s death added a fear premium to the already free-falling crude prices.
The benchmark US crude futures contract increased by over $2 per barrel on Thursday. However, when the time commodity markets opened Friday those gains had mostly vanished. Friday witnessed an increase in US oil by 18 cents to $46.49 a barrel, while Brent was up 80 cents to $49.32 a barrel in London. This rise in US crude was said to be a result of inventory buildup at the Cushing, Oklahoma storage hub and the partial shutdown of a refinery in Indiana. This helped increase the spread between WTI and Brent.
However, this rise in price was temporary and oil prices tumbled further as investors believed that a leadership transition will not likely change Saudi’s oil policy.
The changes in Riyadh helped stabilize the markets. King Salman nominated Prince Muqrin as the Crown Prince and Prince Mohammed bin Naif Bin Abdulaziz was nominated as the deputy crown prince. The temporary rise in the oil market indicated the impact of the transition in Riyadh.
King Salman made it clear that there would be no major changes in policies, helping clear the air of uncertainty. Experts suggested that it is highly unlikely that Saudi Arabia would steer away from the current policy of keeping oil output steady amidst growing US shale oil supply. The King’s death issignificant but it will not change anything as Saudis are trying to defend market share.
Also, the new King has backed the Oil Minister Ali Al-Naimi, who is the major force behind forming the Kingdom’s current oil policy. And as changes in the oil ministry seem unlikely, the uncertainty factor is also gradually dissipating. Thus, majority of the analysts have concluded that there will be no changes in Saudi’s policy and that the Kingdom will not reduce production anytime soon.
Experts suggest that there is game of who should reduce production first between the members of OPEC and non-OPEC nations. And although the price fall has had significant effects on Saudi Arabia, the nation will not give in so easily.
