Saudi Arabia’s King Salman today appointed his 31-year-old son Mohammed bin Salman as Crown Prince (CP) and heir to the throne in a Saudi-style special election. While not a surprise, the timing of the move is somewhat curious and unclear.
The appointment is clearly a nod to the younger Saudi generation where majority of the population is under 25 years of age. It was accompanied by additional appointments of younger royals to other posts, including the 34-year-old new Interior Minister, Prince Abdulaziz bin Saudi bin Naif. In April, King Salman appointed his 28-year-old son, Prince Khalid bin Salman, a former F-15 fighter pilot, as Ambassador to the US.
For oil markets, the Saudi leadership shuffle has potentially major implications.
First, the current Saudi oil policy has the imprimatur of CP Salman. He intervened to scuttle a production freeze agreement that then-Saudi Minister Naimi had negotiated in Doha and then replaced Naimi with current Minister Khalid Falih. The so-called Doha deal was nixed by Saudi demands that Iran participate in the freeze.
Minister Falih’s first big move as the new oil minister was the production cut agreement last November which undoubtedly was approved in advance by CP Salman. Our friends in the region tell us that CP Salman has since stepped back from active management of oil policy, and Minister Falih is firmly in the driver’s seat. Still, all major policy changes will certainly require approval from the CP and King Salman.
Second, and probably most important for oil markets, is that the Aramco IPO will take on even greater significance than it has now. The Aramco IPO is CP Salman’s signature proposal to transform the Saudi economy. As a result, we believe the Aramco IPO, scheduled in 2018, is now driving Saudi oil policy. It was the reason behind the Saudi approval of OPEC’s production cut agreement last year, and the reason why we expect more Saudi moves on production policy this year and next. The success of the IPO depends on oil prices being in a much higher range than today’s price – most likely a $60-70 range. Minister Falih’s central banker-like statement of “whatever it takes” will be put to the test later this year if, as we believe, crude stocks are not depleted enough late this year to boost prices.
After the production cut extension at the May OPEC meeting, we told clients that prices will stay in a $45-55 range this year. However, we are starting to believe this range is now even lower --- which will set up a very consequential OPEC meeting on November 30 in Vienna, Austria.
Third, CP Salman’s elevation signifies a potentially more aggressive Saudi posture with Iran. The summit in Riyadh attended by President Trump kicked off the anti-Iran coalition led by Saudi Arabia, and it continues in the Yemen war, in Syria and in the current GCC crisis with Qatar. While other Arab leaders made congratulatory calls to CP Salman, Iran called the appointment a “soft coup.”
On Saudi oil policy, we believe it’s possible to see a return of Saudi demands that Iran participate in any OPEC production cuts in future deals. This will complicate or make impossible any OPEC agreement on production in November.
However, we continue to believe the greater risk to new Iranian crude exports is from a potential Trump Administration decision to withdraw from the Iran nuclear deal and re-impose US sanctions that would affect any international companies with economic exposure in the US. We believe it would effectively remove about 1 million barrels a day of additional Iranian crude exports to global markets since nuclear sanctions were lifted in 2016. We fully expect CP Salman and Saudi Arabia will be aggressively advocating with President Trump and his advisors to do just that.
