Oil and politics go hand in hand. After all, ‘a century of oil wars’ are now documented. Yet, interestingly enough, things are beginning to appear different, this time. Saudi Arabia, the world’s largest crude exporter, is undergoing a generational change. Markets are abuzz with the possibility of further changes in the days and weeks to come, yet, rather than spiking, oil markets are sinking.
This is a drastically changed world.
Even a decade ago, any rumour of change at the top of the Opec kingpin would have been enough to jolt prices higher. Not this time, though. A real disconnect between the two is visible, now. The political upheaval in Riyadh seems going unnoticed by the crude markets.
And there are reasons for that. We are into a buyer’s market now. The era of seller’s market is gone. Then, China’s appetite for oil was seen growing and growing, fuelling the crude markets, and, as Bloomberg columnist Liam Denning says, shale was, for most people, something to be picked up at the beach.
But in the meantime, crude fundamentals have undergone a major metamorphosis. As the Chinese economy has cooled down and so is its appetite for crude. And shale is no more to be picked up at the beaches only. The US shale crude output is now a major market buster.
The glut of oil inventories, despite supply cut, is smothering excitement in the markets about geopolitics.
In fact, so much so that while Riyadh was undergoing a real change in guards, oil markets apparently remained oblivious to the transformation.
While the world was grappling to understanding the implications of the change at the top in Riyadh, oil prices slipped Wed¬nesday despite a larger-than-expected decline in US crude and gasoline inventories. Brent was down $1.20, or 2.6 per cent, at $44.82 a barrel, while the US benchmark dropped 98 cents, or 2.3pcto $42.53 a barrel in New York.
So much so, that oil is now officially in a bear market, losing 30pc in value this year. This is the worst performance for the crude markets for the first six months of the year since 1997.
The question now being discussed all around is: would the change really matter for the markets? Would the Saudi oil policy undergo changes in the coming weeks and months?
All this needs to be seen from a geopolitical perspective. The rise of Crown Prince Mohammad bin Salman, which may go a step further if the market buzz is to be believed, could translate into more hawkish foreign policy moves and more intensified efforts to confront Iran.
The differences between the two countries worsened in April 2016, when Opec and other oil producers failed in Doha reach a deal to freeze production after Prince Salman, who was then deputy crown prince, insisted at the last minute that for any Opec-led output-cut agreement, Iran needs to join and contribute to output cuts.
The ongoing war through proxies thus may intensify in the coming months, most agree, with both Riyadh and Tehran jockeying for greater influence throughout the region. In a TV interview last month, Prince Salman underlined he saw no common ground with Iran.
Yet, in view of the ground realities, observers do not expect many changes in oil policies. The necessity of higher crude prices, to push ahead with the plans to reform the economy, makes any immediate change in oil policy somewhat unlikely.
The prince’s promotion “will likely mean minimal change to oil-production policy,” though it could lead to more aggressive foreign policy measures “that bring back the political risk premium” to crude prices, Bloomberg quoted analyst Helima Croft as saying.
“Even if there is a more aggressive foreign policy, we don’t see any changes to oil policy yet,” Amrita Sen, chief oil analyst at consultant Energy Aspects Ltd. in London, told the press.
Status quo thus remains, until at least the Aramco IPO which is expected in early 2018. Until then, Riyadh would continue to lead the effort to keep oil and politics apart, striving to ensure oil prices as close to $50 a barrel as possible, even if that meant deeper output cuts.
It could be free for all —after that.