The big question for world oil markets following the death early Friday of Saudi Arabia's King Abdullah and the ascent to the throne of his half-brother Salman is whether the kingdom will make imminent changes to its oil policy, which is currently focused on defending its market share against a rising tide of non-OPEC output.
The news that King Salman has kept oil minister Ali Naimi in his post suggests that there will be no change, at least in the near term, despite the plunge to around $49/barrel from around $110-$115/b in mid-June.
Analysts agree.
FBR Capital Markets said there were compelling economic incentives for Riyadh to continue with its market share strategy.
"Most notably, production cuts would not necessarily increase Saudi Arabia's net revenue; they have the added disincentive of effectively subsidizing technological innovation in the US shale patch, as well as funding rivals in Iran and Russia," the bank said.
Commerzbank also sees no oil policy adjustments although it suggested that the new monarch, who formerly headed the country's petroleum committee, might "intervene more actively" in oil policy.
Further out, however, some analysts are questioning whether there may be policy changes when oil minister Naimi eventually leaves his post.
"Medium-term, there are legitimate questions about Saudi Arabia's policy direction if and when Naimi vacates the position of oil minister or if subsequent succession challenges arise," FBR said.
"...Naimi has reportedly voiced a desire to retire from the oil ministry at some point; an eventual transition -- unlikely before June's OPEC meeting -- could further fuel uncertainly.
Fereidun Fesharaki, chairman of consultancy FGE, expects oil policy to remain unchanged under Salman, but suggests that a change at the helm of the oil ministry could come early as June with a cabinet reshuffle.
"Minister Naimi has expressed his wish several times to retire but was instructed by the King to continue," Fesharaki said in emailed comments.
He also suggested that, although the oil minister has always been a commoner, Naimi's eventual successor could be "the very capable" Prince Abdulaziz bin Salman, son of the new king and currently the deputy oil minister.
"There is a 50-50 chance that the King might break with tradition and appoint him as oil minister," he said.
Another possible candidate could be Khalid al-Falih, chief executive of state oil company Saudi Aramco, Fesharaki said.
Capital Economics said it made little difference who was nominally in charge of Saudi Arabia because oil policy was largely determined by technocrats and that, in any case, the fundamentals of supply and demand suggested that prices were set to recover. CE expects Brent to return to $60/b by the end of 2015.
"The earlier slump in prices is starting to constrain supply: the number of active rigs in the US has begun to dip, and many new projects elsewhere have been abandoned or postponed. What’s more, the latest global business surveys suggest that economic activity is picking up again at the start of 2015. This should ease fears about demand," it said.
Paul Horsnell of Standard Chartered bank says one of the key decisions the new Saudi leadership will have to make is when to ease up on its market share strategy.
"The current position is that they are engaged in a bold strategy, where one of the boldest decisions within that strategy is going to be when to stop it and allow prices to rise," he said.
A bold exit could be a quick one, while a more cautious exit could be a slower one, he said.
"In other words, does becoming more cautious actually mean sticking with the bold strategy for longer?" he said, making the point that Saudi policy is continuing to evolve and will be shaped by many different nuances over time.
Challenges
The 79-year-old Salman takes power at a challenging time for Saudi Arabia, both economically and regionally.
The kingdom is facing the threat of the Islamic State insurgency in Syria and Iraq spilling over its northern border, while to the south Shia Houthi rebels have forced the Yemeni president to resign amid continued clashes.
At home, it also faces the challenge of rising youth unemployment which currently stands at around 30% according to International Monetary Fund estimates.
In late December, the Kingdom announced a deficit of some $38.5 billion in its budget for 2015, with spending planned at close to $229 billion and expected revenues of around $190 billion.
Saudi bank Jadwa Investment, which estimates that the budget is based on an average Brent price of $60/b, said at the time that financing the deficit would not be a problem because of the $736 billion held in the kingdom's sovereign wealth funds.
A former adviser to oil minister Naimi said earlier this week that Saudi Arabia's "huge" financial buffers would enable it to cope with low oil prices for "at least eight years" if it rationalized spending (ON 1/20).
The International Monetary Fund said on Wednesday that Gulf Arab producers were set to lose a collective $300 billion in oil export revenues this year. It said, however, that because most of these wealthy states had built up sizeable financial reserves during several years of high prices, they would be able to fund as many of five years of budget deficits with no big impact on government spending.
Naimi drove oil producer group OPEC's November 27 decision to maintain official crude output at 30 million b/d. Naimi was supported by his counterparts from Kuwait, the UAE and Qatar.
But there was little public support for the agreement from the other eight members, which are variously less well equipped than the Gulf camp to deal with the price crash.
Libyan production is yo-yoing up and down -- depending on whether fields or ports are open or closed -- and at a fraction of the 1.6 million b/d the country was pumping before the 2011 uprising, with the value of every one of those barrels falling day by day.
Iran, whose oil exports are limited by international sanctions, believes politics as well as economics is behind the price slide. Oil minister Bijan Zanganeh has said he was disappointed with the OPEC decision.
Venezuela, which led the movement within OPEC for an output cut, will see its economy contract by 7% this year, the IMF expects. According to Alejandro Werner, the agency's Western Hemisphere director, every $10/barrel decline in oil translates to a worsening of the country's trade balance by 3.5% of GDP. He has described Venezuela's situation as "unparalleled."
Algeria, Prime Minister Abdelmalek Sellal said this week, is now in a state of economic crisis as a result of falling oil prices and will defer a number of key infrastructure projects while continuing to invest in social projects. The country, whose 2015 budget is based on $60/barrel oil, has sufficient cash reserves to meet its development budgets for the "next three or four years" without any issues, Sellal said.
And, as it turns out, not all of Saudi Arabia's Gulf neighbors are happy to endure the kind of oil prices we are seeing now.
Oman, along with the four Gulf Arab members of OPEC and Bahrain, is part of the six-state Gulf Cooperation Council, a body that aims to coordinate policy in a number of spheres, including energy. The GCC says on its website that "member states should develop common oil policies and take common positions towards the other world countries and at the international and specialized organizations."
But Oman this week sharply criticized the Saudi-driven policy adopted by OPEC, saying he failed to understand how market share could be more important than revenue.
Relations with Iran
Relations between Suni Saudi Arabia and Shi'ite Iran have been strained for many years, but since Iranian President Hassan Rouhani took office in 2012 Tehran has shown interest in wanting to resolve the major differences between the two states, while also expressing dissatisfaction over Saudi policy on certain regional issues.
In mid-December, Iranian foreign minister Mohammad Javad Zarif criticized "regional" countries for not taking measures to help boost falling oil prices.
"It is deplorable that the countries in the region do not cooperate regarding the fall in the oil price and its negative impacts," Zarif said at the time.
There had been plans for Zarif to visit Riyadh in early 2015 following a meeting with his Saudi counterpart, Saud al-Faisal, last September in New York.
But a senior Iranian government official said last week that "harsh and unexpected" statements from Saudi Arabia about Syria, a political ally of Iran, had prompted Tehran to step back in its diplomatic efforts.
"We had planned that Zarif's meeting be held in Riyadh but we faced pressure from inside Iran because of unacceptable comments by Saud al-Faisal about Syria," Hossein Amir-Abdollahian, deputy foreign minister for Arab-African affairs, was quoted as saying by Iran's Arabic-language satellite channel, al-Alam, on January 17.
"We hear reports that in this period of time, some regional countries in collusion with countries outside the region have pushed down the oil price and we expect Saudi Arabia to play its main role with regard to oil prices to help the regional countries," Amir-Abdollahian said in the interview.
However, official Iranian news agency IRNA reported Friday that Zarif would attend a ceremony to mark the death of the late King Abdullah on Saturday in Riyadh, signaling a break in the political tension between the two OPEC producers.