Monday, May 9, 2016

Here’s what the departure of Saudi Arabia’s al-Naimi means for oil prices

Oil prices could rise in the near term on volatility

AFP/Getty Images
Saudi Arabia’s Ali al-Naimi, right, at a May 4 meeting

He was known to some as the Alan Greenspan of the oil world.

That is Ali al-Naimi, Saudi Arabia’s powerful oil minister, who was fired from his post on Saturday. He will be replaced by Khalid-al Falih, the chairman of the country’s state oil company, Saudi Aramco.

“This is a historic one. [Al-Naimi] is the guy who for all intents and purposes has been the global oil market for the last 30 years,” said Phil Flynn, senior market analyst at Price Futures Group.
Al-Naimi gained global respect for turning the biggest oil cartel in the world, otherwise known as the Organization of the Petroleum Exporting Countries (OPEC), into a respectable organization, Flynn said in a telephone interview. And just as former Fed Chairman Greenspan would lower or raise interest rates when he thought the market needed it, al-Naimi would add or hold back on oil depending on the energy market’s needs, he added.

The move has reminded some who is ultimately in charge. While al-Falih, the new oil minister, now has one of the most powerful posts in the world, Flynn said there is no doubt that 36-year old Deputy Crown Prince Mohammed bin Salman is running the show in Saudi Arabia. “This guy is the new power broker in that country,” he said.

The dismissal of al-Naimi comes weeks after the Saudi government unveiled a plan to wean the country off its dependence on oil revenue, given the hit the country has taken from lower oil prices.
Read: Meet the 30-year old prince leading the charge to wean Saudis off oil
Some saw the writing on the wall for al-Naimi after major oil producers failed to reach a deal to freeze production in Doha, Qatar last month. While al-Naimi had previously said a deal was possible even if Iran didn’t take part, Prince Mohammed by all accounts put his foot down and no deal was done.
AFP/Getty Images
Khalid al-Falih, pictured in January.
Worry about al-Falih? Flynn said al-Naimi survived as many of his buddies were fired under Prince Mohammed’s father, King Salman bin Abdulaziz Al Saud. He said King Salman stopped short of axing al-Naimi because of the respect he commanded both in the country and abroad. It was clear, he said, that al-Naimi didn’t have the power to get a deal done at Doha. 

But what some may not realize is that al-Falih also commands much respect in the oil world, said Jason Bordoff, a professor at Columbia University and founding director of the Center on Global Energy Policy in New York. “Everyone who pays attention to Saudi Arabia and oil prices knows Khalid al-Falih is very widely regarded and respected as a capable leader of Saudi Aramco,” he said in a telephone interview.

Al-Falih has been working closely with the Prince Mohammed and seems to have the “confidence and trust of him,” said Bordoff, who served as White House energy adviser to President Barack Obama from 2009 to 2013. 

“Saudi Aramco is widely regarded as one of the most technically sophisticated oil companies in the world, and I’ve had some personal dealings with Khalid and many other people who have view him as an incredibly impressive and smart and capable person,” he said. 

Before Saturday’s announcement, Al-Falih had been the country’s health minister, tackling a problematic area of the country’s economy, he said.

As for al-Naimi, no one should be that surprised at an 81-year old, who had spoken for years of retiring, is finally leaving that powerful oil post, he said.

Where now for oil prices? If there’s one thing that rattles the oil market, that’s any sort of surprise, and it’s fair to say the market may get the jitters over the news out of Saudi Arabia. 

The Doha meeting created uncertainty for the oil market as well as questions over Saudi Arabia’s futures policies and whether it will rise to the occasion such as in the past, raising and lowering global oil production when it was needed for the rest of the world, said Flynn.

Now uncertainty in the wake of Saturday’s news could give oil prices a push in the near term, he said.
“My assumption is that we’re in a globally oversupplied market. The market might look at it two ways: more uncertainty is bullish overall, though in the short term there is this perception that Saudi Arabia may flood the market with oil,” said Flynn.

Just ahead of the failed Doha meeting, Prince Mohammed told Bloomberg in an interview that his country could boost its daily production number by as much as 20 million barrels if it invested in production capacity and by up to 11.5 million barrels a day right away. But Flynn said that given the country is seeing a strain on its finances because of weak oil prices, it can’t really afford to start ramping up production by more than a small amount.

He said it would be worth watching China closely as for how well the oil market deals with news of a new oil minister in Saudi Arabia. The Shanghai Composite SHCOMP, -2.79%  fell nearly 3% on Friday on worries about looming bond defaults.

China crude imports in March were the second-highest on record, and any signs that the economy or stocks are stressed will lead the oil market to believe the country could curb that demand, said Flynn. But he’s ultimately optimistic about prices, provided the Chinese economy doesn’t fall apart. 

If the Chinese economy does melt down again, he said the market will be talking about a glut, and if things stabilize in China, the conversations will be quite different, more along the balance side.
Bordoff said he doesn’t see much reaction coming from the oil market, though he agrees the changing of the guard could drive prices up in the short term. 

“We’ll be watching the next 24 to 48 hours to see if any other news comes out. I don’t think that this was that unexpected. I don’t think people will view it as any indication that large-scale changes are imminent in Saudi oil policy,” he said.

West Texas Intermediate futures CLM6, -1.79%  finished last week down 2.7%, while Brent crude LCON6, -2.53% the global oil benchmark, slid 4.2%. Oil gained on Friday, though as news of wildfires in an oil-rich region of Canada and disruptions to an offshore oil facility in Nigeria outweighed a disappointing U.S. jobs report.

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