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Did Oil Markets Overreact To The Saudi Purge?

Courtesy of Nick Cunningham, OilPrice.com

Saudi Arabia’s powerful crown prince led a massive purge over the weekend, ousting around a dozen royal cousins in a bid to consolidate power.

The removal and detentions of so many members of the royal family were ostensibly the outgrowth of an anti-corruption campaign, but the actions put the top security institutions under the control of the king and the crown prince after having been distributed among different family factions for decades. In essence, Crown Prince Mohammed bin Salman (aka, MBS) has ended decades of tradition and has consolidated power in his own hands, making him the most powerful figure the country has seen in generations.

MBS also removed one of his rivals for the throne, Prince Miteb bin Abdullah, son of the late King Abdullah. Many analysts expect the octogenarian King Salman to abdicate the throne in the coming months, and the ouster of Miteb paves the way for MBS to take over.

The purge also took down the richest Saudi investor, Prince Alwaleed bin Talal, a move that “would be like arresting Warren Buffet or Bill Gates in the United States,” Robert Jordan, former U.S. ambassador to the kingdom, told CNBC.

Favorable interpretations of what is playing out in Riyadh view the actions as a way to push forward with economic reforms. “The new leadership is committed to modernizing the economy and diversifying the economy and addressing the issue of over-reliance on oil,” Khatija Haque, head of Middle East research at Emirates NBD PJSC, told Bloomberg. “What this signals is that the crown prince is strengthening his position to continue with pushing forward with the reforms that are needed.”

But analysts say the actions by MBS could undercut one his own top priorities: Attracting international investment, specifically for the IPO of Saudi Aramco. The arrests without due process “sends a chill down the spine of foreign investors,” Bernard Haykel, a professor at Princeton University, told the New York Times in an interview. Moreover, a Saudi Aramco board member and former finance minister was actually included in the series of detentions.

Meanwhile, Saudi Foreign Minister Adel al-Jubeir said on Monday that the Saudi government has the right to respond to Iran’s “hostile actions,” after a missile was reportedly fired by Houthi rebels from Yemen. The missile was intercepted, but Saudi state press said the government “considers this a blatant act of military aggression by the Iranian regime, and could rise to be considered as an act of war against the Kingdom of Saudi Arabia.”

And to make matters even more bizarre, a Saudi prince was killed in a helicopter crash near the border with Yemen on Sunday, a seemingly unrelated event with an unknown cause.

The sudden turmoil in Saudi Arabia likely helped push oil prices to their highest level in two and a half years on Monday, with Brent breaking $64 per barrel and WTI moving past $57 per barrel during intraday trading.

However, the Saudi purge does not necessarily mean a change in oil policy. Saudi officials have been pushing for an extension of the OPEC cuts through the end of 2018, particularly as they prepare the IPO of Aramco.

“We believe the kingdom will stick to the OPEC+ deal and continue to focus on reducing global oil inventories,” UBS oil analyst Giovanni Staunovo told Reuters.

At the same time, the political intrigue has introduced an element of geopolitical risk, which could be helping to add a bit of bullish momentum to oil prices.

“Uncertainty about core regime stability has gone up a bit, so a higher risk premium is justified,” Samuel Ciszuk, a senior adviser to the Swedish Energy Agency, said at the Reuters Global Oil Forum.

With all of that said, there are more important factors governing the price of oil. The fate of the OPEC extension is first and foremost. After that, oil investors are keeping an eye on the response from U.S. shale to rising oil prices. The sharp decline in the rig count last week is probably more important in the eyes of some oil traders than the purge in Saudi Arabia.

The latest events come as oil prices had already been gaining strength. A recent Wall Street Journal poll of 14 investment banks finds an averaged predicted Brent price in 2018 at $54 per barrel, an increase of $1 per barrel since September and the first increase in six months for the poll.


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