After King Abdullah, will Saudi oil stay secure?

The passing of Saudi Arabia's King Abdullah caused a brief spike in oil prices, but his successor, Crown Prince Salman, has pledged continuity in energy policy. Broader security issues could roil oil markets down the road.

For oil markets at least, the new king looks a lot like the old one.

News of Saudi Arabia's King Abdullah passing sent jitters through global oil markets late Thursday, briefly reversing a long-term downward trend in oil prices. Any major change in the world's largest oil exporter is bound to put investors on edge, but speculation over changes in Saudi energy policy were quickly put to rest. Crown Prince Salman, Abdullah's handpicked successor, said early Friday there would be no significant policy shifts, and that Saudi Arabia would keep the oil spigots open.

Oil markets, in other words, are likely to remain flooded with supply amid stalling global demand. Barring any sudden disruption, analysts mostly expect oil prices to remain low or drop even lower – having already fallen by more than half since last summer. For now at least, it looks like Saudi Arabia has no intention of letting up on a strategy that pits it against rising US oil production in a competition for the uncertain future of global oil.

"The market seems to be settling back on assurances that King Salman is reiterating that he’ll keep the same oil minister and same energy policy, which for now is flooding the market with oil to drive down prices," says Phil Flynn, senior energy analyst at The PRICE Futures Group in Chicago. King Salman issued a decree early Friday announcing that Oil Minister Ali Al-Naimi, who has favored a policy of letting oil prices fall, will keep his position, according to the Saudi Press Agency. 

As rumors spread about King Abdullah's health Thursday, Brent crude oil prices initially jumped as high as $50.45 per barrel before settling at $48.52 for the day as it seemed increasingly clear there would be no major changes in policy. The global benchmark for crude was trading slightly up at $48.91 early Friday. That's down some 58 percent since last June, when Brent traded above $117 a barrel.   

There are some signs the oil price crash may be ending, or at least slowing down. Drillers across the globe are already scaling back current oil production and scrapping plans for future exploration in response to oil's rapid devaluation. Much of that adjustment is happening in the United States, where new oil flows mostly from shale drilling operations that tend to be more expensive and easier to ramp down when prices drop. There were 1,366 drilling rigs actively searching for oil in the US last week, according to Baker Hughes, a major oilfield services company. That's down 4 percent from the prior week.

But that slowdown in production won't translate to higher prices right away, and an oversupplied global economy will continue to weigh on prices for the near term. "It will still take most of 2015 to see US oil production level off as rigs are idled and companies cut their exploration and production budgets," says Andrew Lipow, president of Lipow Oil Associates in Houston. 

 

The larger question for oil markets is the long-term stability of the Middle East, analysts say. As oil prices fall, Saudi Arabia has been under tremendous pressure to scale back domestic social welfare programs to ease budgetary shortfalls. And while King Abdullah's successor was an obvious pick, there is a far greater degree of uncertainty over who might succeed septuagenarian King Salman. As low prices take their toll on more vulnerable OPEC members – like Iran and Venezuela – there will be more pressure on Saudi Arabia to reconsider its current oil policy. Those coming challenges – combined with a growing crisis across the border in Yemen – cast some long-term doubt over the security of Saudi oil.

As average US gas prices slide toward $2.00 a gallon, a regime change halfway across the world may not immediately register for American motorists enjoying enormous relief at the pump. But even as the US now rivals Saudi Arabia for title of world's largest oil producer, analysts say the US remains exposed to a global market that is fundamentally volatile.

“Today, as it has been for the past 100 years, oil remains the lifeblood of the American economy, powering 92 percent of our transportation and accounting for nearly 40 percent of our energy economy—more than any other fuel," Robbie Diamond, president and chief executive of Securing America’s Future Energy, a Washington-based group that advocates for reduced US oil dependency, said in a statement responding to King Abdullah's passing. 

"And while the incredible surge in domestic oil production over the past five years has generated significant job growth, dramatically cut our oil import bill, and led to temporarily lower prices at the pump, the truth is that increased production here at home has not severed our linkage to the global oil market," he adds.