Saudi Arabia oil policy likely to stay under new King Salman

Focus article by Muhamad Fadhil

DUBAI (ICIS)–Saudi Arabia is expected to maintain its “no production cut” policy after the death of King Abdullah bin Abdulaziz, who ruled the world’s biggest crude exporter since 2006 and will be succeeded by his brother Salman, petrochemical industry sources said on Friday.

Abdullah, thought to have been born in 1923, died Friday morning.

Saudi Arabia is the most influential member and largest producer in OPEC and has been a driving force in the organisation’s decision not to lower production in the face of the recent decline in oil prices.

Crude futures strengthened following news of King Abdullah’s death.

At midday, US crude futures for March delivery rose 90 cents to $47.21/bbl, while Brent crude for March shipment was trading 93 cents higher at $49.45/bbl, recouping some losses incurred in the previous session. On Thursday, oil prices slumped on the strength of the US dollar after the European Central Bank (ECB) announced plans to inject at least €1,100bn ($1,250bn) economic stimulus into the eurozone.

Oil’s recent gains, however, may not be sustainable given the general perception that Saudi Arabia’s oil policy is unlikely to change.

“Policies don’t change overnight. Any impact [on oil markets] will take time,” an Asian-based polymer trader said.

Crude prices have plunged more than half since June last year on concerns over weakening global demand amid a supply glut caused by increased shale production in the US.

Salman, who is believed to be 79, is not expected to overturn his brother’s policy to prop up oil prices upon his succession to the throne.

Saudi Arabia is bent on preserving its status as the world’s largest oil producer, and has hopes of increasing market share by offering crude at lower prices, a Dubai-based petrochemical distributor said.

In early January, Salman, on behalf of Abdullah, had said that Saudi Arabia would tackle the challenges presented by the oil price decline “with a firm will”.

“Saudi will take a long term view on oil,” the petrochemical distributor said.

At the World Economic Forum in Davos, Switzerland, OPEC Secretary General Abdullah al-Badri said on Thursday that he expected oil prices to remain around current levels before rebounding in February.

Given its sizeable foreign exchange reserves built over the years from oil revenue, Saudi Arabia can withstand a prolonged period of low energy prices.

According to the International Monetary Fund (IMF), Saudi’s reserves are estimated at $750bn.

“Saudi Arabia can always tap on its reserves if it needs money,” a separate Dubai-based trader said.

Early this month, the country’s oil minister Ali Al-Naimi was quoted as saying that OPEC will not cut production even if crude prices fall to $20/bbl.

Naimi had earlier said that Saudi Arabia enjoys comparatively low production costs of about $5/bbl and can hold out for much longer than high-cost oil producers in periods of low energy prices.

Additional reporting by James Dennis and Pearl Bantillo

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