Oil Prices On The Move After Saudi King’s DeathEmail Print Tweet smaller Larger By Dimitra DeFotis The price of crude is higher this morning on news that a new member of the royal family will lead the country following the death of King Abdullah. Prices for oil have been volatile this morning. The international Brent price for crude oil was up 0.4% to $48.73 per barrel in recent trading, while the U.S. price was down 0.5% to $45.77.
New Saudi King Salman pledged on Friday to maintain existing energy and foreign policies. The 90-year-old monarch had been in ill health, and successor King Salman, near age 80, is expected to maintain Saudi policies. Chief among them: keeping oil production levels steady, which has depressed oil prices and pushed oil-dependent economies in Russia and Venezuela into financial chaos.
The Saudis need an $80 Brent price to break even, according to a recent report by John Sfakianakis at asset manager Ashmore Group. But the Saudis recently announced a $229 billion budget for 2015, with – -for the first time since 2009 — a deficit of $29 $38 billion. And the Saudis can withstand years of low oil prices and deficit spending, even though oil is 85%-90% of the country’s revenue. Sfakianakis writes:
“Saudi Arabia could finance spending for three years from just savings and non-oil revenues without resorting to debt issuance and without having any oil revenues. Very few countries have such firepower. In short, Saudi Arabia has a fiscal cushion to support highly countercyclical policies for the foreseeable future.”
The kingdom’s succession plan favors old age: next in line is Prince Muqrin, who is 69. But no one is predicting Saudi Arabia’s youthful population, estimated at 30 million, will revolt, despite the slow pace of reform – things like affordable housing, unemployment benefits, and small-business loans. The kingdom’s reputation for maintaining order with a heavy hand is unlikely to change, especially with bordering instability in Iraq and Yemen, and tension across the Persian Gulf with Iran.
In the next few days, writes Teneo Intelligence Analyst Crispin Hawes:
“Saudi Arabia’s closest allies, such as the UAE, Kuwait, Pakistan and Egypt, will be given pride of place in the formal acknowledgment of their condolences while the ceremonial process will also allow for quieter diplomatic contact with states with which the kingdom has a more difficult relationship, even including Iran. … Externally, the two most important current policy trajectories are likely to be maintained. The kingdom will keep to Minister of Petroleum Ali al-Naimi’s oil production strategy of maintaining market share despite the impact on crude price. …In security terms, Saudi backing for the anti-jihadist coalition and the Egyptian government, which are in essence two strands of the same policy, will also remain firm and public. … In the absence of constitutional process, the roles of senior family members and the tensions between them will continue to give rise to speculation … that the succession is about to change. Since the longevity of most of the men involved can hardly be guaranteed, the issue of succession remains the kingdom’s major underlying risk factor.”
Saudi Arabia’s equity market — not part of official emerging or frontier indexes — limits outside investment, but is expanding this year. Keep an eye on the WisdomTree Middle East Dividend Fund (GULF), the T. Rowe Price Africa & Middle East Fund (TRAMX) and the SPDR S&P Emerging Middle East & Africa ETF (GAF). Among emerging market oil plays, Brazil’s state-controlled producer Petroleo Brasilero (PBR) is down 2% this morning, and China’s CNOOC (CEO) is down 1%, while Russia’s Lukoil Holdings (LUKOY) is up 2%.
