Saudi Arabia King Salman on Sunday replaced Energy Minister Khalid al-Falih with his son Prince Abdulaziz bin Salman in a move that most expected as eventual after the King assumed the throne in 2015.
There have only been five Saudi oil ministers since 1960 so replacing a minister gets the attention of oil markets. Even with the rise of US shale, Saudi Arabia continues to be the global leader of oil markets and the Saudi Minister is its top manager.
Al-Falih became minister in 2016 replacing long-time minister Ali Naimi. Last week, Al Falih saw his role diminished by being replaced as Aramco Chairman and his mega Ministry of Energy and Industry portfolio being split into two separate ministries. In hindsight, these moves were a prelude to the appointment of Prince Abdulaziz as the new oil minister.
While we had believed it was only a matter of time before Abdulaziz became oil minister when his father became King, we think the appointment and timing of the move provide key takeaways for oil markets.
1) Prince Abdulaziz is a seasoned oil veteran with deep knowledge and experience that gives the Kingdom and oil markets stability.
He has been the deputy oil minister for more than 10 years under two oil minsters and Kings. As a result, he is well-known to fellow OPEC and energy ministers and oil industry leaders.
Much is being made in the press about a Saudi royal assuming the oil ministry post but as we’ve already said he is enormously qualified for the position. Moreover, as the King’s son, he will bring even more authority to Saudi oil policy and OPEC meetings.
We don’t see any change in Saudi or OPEC policy with Abdulaziz as minister. Saudi oil policy of cutting production and exports (mainly to the US) will continue to further strengthen oil fundamentals amid signs of a slowing global economy.
While al-Falih was viewed as a global oil diplomat, Abdulaziz is viewed as being a diplomat within OPEC. He was the key architect of the recently signed OPEC+ charter that was signed in June that will continue cooperation between OPEC and Russia and other non-OPEC producers. In addition, he has taken on leadership roles in key OPEC initiatives including developing a strategy on the proposed US NOPEC legislation.
If there is one area to watch with Abdulaziz, it would be the public spokesman role as oil minister and defacto leader of OPEC. The Saudi Oil Minister needs to be the key communicator to oil markets - a role in which al-Falih excelled. For his part over the last 10 years, Abdulaziz has preferred to work behind-the-scenes effectively but quietly as deputy oil minister.
Markets will get their first glimpse of Abdulaziz in this communicator role on Monday with a speech at the World Energy Conference in Abu Dhabi and OPEC’s Joint Ministerial Monitoring Committee later in the week.
On a personal note, I first met Prince Abdulaziz in 2001 when I was Chief of Staff at the US Department of Energy. We would see him several times a year at energy conferences and bilateral meetings and got to know him well over the years. He is very astute about oil markets as well as knowledgeable about US energy policy and geopolitics. He is certainly well-known and thought of by the energy community in Washington and Houston. At OPEC meetings, he has been very generous in providing insights for me about the inner-workings of OPEC and Saudi policy objectives.
2) Saudi resolve to do more to increase oil prices.
It would be an understatement to say that the Saudi leadership is frustrated by the decline in oil prices that began in late Spring. Oil revenue is at the center of Crown Prince Mohammed Bin Salman’s major initiatives to transform the Saudi economy.
The frustration is especially high in light of the extensive actions Saudi Arabia has taken with regard to production cuts, export cuts to the US and close coordination with top producer Russia on cooperative cuts.
The timing of Al-Falih’s dismissal is a direct result of this frustration, whether warranted or not. A change in leadership at the oil ministry is also intended to bring about a change in oil prices.
Oil prices, which we believe are discounted by at least $10 due to tightening fundamentals, are captive to global recession fears and the US-China trade war narrative and will continue to be a key challenge for Abdulaziz as minister.
The Saudi oil shakeup is also designed to shakeup this current narrative controlling oil prices.
We see Abdulaziz’s appointment as a signal of further resolve from Saudi Arabia to do more to increase oil prices. It’s not clear what additional steps the Saudis can take to impact oil prices - outside of deeper cuts and/or cuts in nominations. We will be watching for early signs from the new Minister this week in Abu Dhabi.
3) Aramco IPO is real and coming soon.
Since King Salman assumed the throne, an Aramco IPO has been one of the key initiatives of the new leadership.
The media has been skeptical of the IPO ever happening, especially with the goals of a $2 trillion valuation and raising $100 billion in capital.
Indeed there have been growing pains in preparing a behemoth state-owned company for the scrutiny of a public listing. But Aramco has made steady progress, and we were told late last year it was ready to go. Minister al-Falih in December said at a press conference that the only remaining step was for the state shareholder to give the green light on timing.
However, it was a well-known secret that the Aramco establishment was not enthusiastic about the IPO. To be sure, Aramco was dutifully complying the royal directive to prepare for the IPO but there was a sense that it was slow-walking the process.
As the former Aramco CEO and current Chairman, al-Falih was viewed as being cautiously supportive of the IPO. But we are told that he advocated internally that oil prices needed to be comfortably around $70 for a successful IPO.
The Crown Prince is a man in a hurry, and we believe was quite frustrated in the IPO delay. In replacing al-Falih with his brother and naming close ally PIF CEO Yasir Al-Rumayyan as Aramco Chairman, MBS hopes to have the Aramco IPO completed next year.
Of course, oil prices will be an important factor in the timing and success of the IPO. We see the strong desire to complete the IPO as another indication of Saudi resolve to increase oil prices.
