A new era for Saudi oil
By Dr. Cyril Widdershoven – Berry Commodities – Global Head of Strategy & Risk
After a long time of low-profile strategic moves, Saudi Crown Prince Mohammed bin Salman stepped back into the spotlights with a bang.
International media are still digesting the news of the removal of Saudi Minister of Energy Khalid al-Falih and the fact that the Aramco IPO now at last seems to be materializing. The Kingdom?s energy sector has become the latest scene of the long-awaited power battle between conservatives and MBS supporters. After a surprise announcement that the Saudi Ministry of Energy, Minerals and Mines will be split into two separate entities, leaving Saudi?s mediagenic Khalid Al Falih in charge of the Minister of Energy, while appointing Bandar Alkhorayef as Minister of Minerals and Mines, further reshuffling has baffled analysts and media alike.
Since months rumors have been heard about a possible conflict between Khalid Al Falih (and others) and MBS supporters on the course to be taken for the Aramco IPO. Shortly after the announcement of the IPO, a surprise move by Crown Prince Mohammed bin Salman, it was clear that conservative forces within the Kingdom and circles around Khalid Al Falih were not really amused about the whole venture. MBS? approach of the IPO, without taking a more long term view, seemed to have surprised the old guard.
At present, the dice have been thrown, and changes to power structure at the Energy Ministry had to be made. The struggling Aramco IPO caused strains within the Saudi government, while Khalid Al Falih?s strategy of an OPEC+ production cut agreement has not yet been successful enough. Main point of criticism on Al Falih has been that the successful OPEC+ strategy to remove millions of bpd of crude from the market not has resulted in higher oil prices. Even that Al Falih is not a Djinni, this put a dent in his shining armor.
The coming weeks, the new minister of energy, supported by MBS, will have to make harsh choices. Prince Abdulaziz?s first target will be to decide if OPEC+ will continue with its strategy to remove additional barrels from the market or to end its current approach. This week?s OPEC+ joint ministerial monitoring committee (JMMC) meeting in Abu Dhabi will be a litmus test. The replacement has oil markets on edge, especially as the appointment breaks with the tradition that members of the Saudi royal family are not appointed to that position.
The appointment of Prince Abdulaziz should not cause more instability in the market. The new minister of energy will not only continue the OPEC+ strategy, but for sure is willing to renegotiate possible deeper production cuts, as the target is clear at present. Saudi Arabia, with MBS at the helm, will want a stable healthy oil market, and would be wise to avoid a new oil glut, as the Aramco IPO will need to become a success story. Higher oil prices are needed to reach the ?official? IPO targets the coming months. Saudi Arabia is clearly not happy with a US$60 per barrel situation.
Crown Prince Mohammed bin Salman?s master stroke also has put his Saudi Vision 2030 goals in place. By splitting up the Ministry of Energy, Minerals and Mines into two separate entities, he acknowledged that one person leading two totally different major programs of the Saudi Vision 2030 strategy the coming years is unfeasible. For the Ministry of Energy, now to be led by Prince Abdulaziz, challenges are already staggering. He will need not only to address a successful oil price strategy to support the Aramco IPO, but also will need to counter international market threats coming from lower economic growth, renewables and the continuing US shale drive. At the same time, Prince Abdulaziz will need to step into the footsteps of Khalid Al Falih, who has been the front man not only for Saudi Arabia, but also leading the OPEC+ discussions.
At the same time, Crown Prince Mohammed bin Salman has also made clear that all opposition to the Aramco IPO has now been removed. Already before the weekend, MBS put the Aramco IPO future in the hands of the new chairman of the oil giant, Al Rumayyan, who is not only chairman of the Saudi sovereign wealth fund Public Investment Fund, but also loyal to the Crown Prince. The choice has been criticized by some, but the role of the PIF in leading the IPO process is now clear.
Analysts should be closely watching the timing of this event. MBS? move comes just before Future Investment Initiative 2019 in October in Riyadh. The so-called ?Davos in the Desert?, which officially is focusing on technology, innovation and food, will now become the stage for MBS to show his vision on the future of the Kingdom, with as main act the Aramco IPO.
By Dr. Cyril Widdershoven for Oilprice.com