Oil Prices Probably Won't Keep Gains Made After Death of Saudi King

The increase in oil prices after the death of Saudi Arabia’s King Abdullah will probably be short-lived amid an oversupply in the crude market. Brent, the global oil benchmark, climbed as much as 2.6 percent and U.S. marker WTI jumped 3.1 percent after the king’s death was reported by the state-run Saudi Press Agency. Crown Prince Salman bin Abdulaziz, Abdullah’s half-brother who will succeed him, is seen sticking to the oil policy of the world’s biggest crude exporter. Saudi Arabia, OPEC’s biggest producer, has led the group’s strategy of maintaining production quotas amid a 58 percent drop in crude since its peak in June. While smaller producers including Venezuela called for action to prop up prices, Saudi Oil Minister Ali al-Naimi highlighted the need to preserve market share as global demand slows and the U.S. pumps the most since 1983. “There’s still an overwhelming glut of supply in global markets,” said Stephen Schork, president of Schork Group in Villanova, Pennsylvania. “Certainly this death matters but it doesn’t fundamentally change anything. The Saudis are trying to preserve market share and have been quite clear about that.” West Texas Intermediate crude rose as much as $1.45 to $47.76 a barrel in electronic trading on the New York Mercantile Exchange and was at $47.17 at 9:49 a.m. in Singapore. Brent on the London-based ICE Futures Europe exchange rose as much as $1.28 to $49.80. Price Volatility Oil volatility may rise after the Saudi king’s death until the kingdom provides clarity on its policy, succession and new appointments, said Neil Beveridge, a Hong Kong-based analyst at Sanford C. Bernstein & Co. “The key point is that it comes at a very difficult time given the cut in Saudi’s budget and what’s going on with OPEC and also what’s going on with politics in the Middle East,” Beveridge said. The plunge in oil prices prompted HSBC Holdings Plc this month to cut the 2015 economic outlook for 13 crude exporters across central and eastern Europe and the Middle East. Saudi Arabia, whose crude production averaged about 9.7 million barrels last year, may post a budget deficit at 11 percent of gross domestic product this year, HSBC said. The Organization of Petroleum Exporting Countries decided at a November meeting to maintain production targets at 30 million barrels a day. The group pumped 30.239 million in December, exceeding its quota for a seventh month. Members including Venezuela and Iran have questioned the group’s decision. Oman, the biggest Middle Eastern oil producer that’s not part of OPEC, is having a “really difficult time” because of low prices, Oil Minister Mohammed Al-Rumhy said this week. Shale Boom Oil supply is growing faster than demand, helped by a surge in U.S. production, which the Energy Information Administration forecast will rise to 9.31 million barrels a day this year, the most since 1972. The nation’s oil boom has been driven by a combination of horizontal drilling and hydraulic fracturing, which has unlocked shale formations from Texas to North Dakota. “There is not as big a reaction, one, because it’s not that much of a surprise, and two, because the world has a glut of oil,” Phil Flynn, senior market analyst at the Price Futures Group in Chicago, said by phone. “There’s not as much fear as there would’ve been had he died during the supply situation of 2005 or 2006. Had he passed away then, it would’ve been a lot more violent of a reaction.” There’s speculation the king’s death may increase instability in the Middle East and in Saudi Arabia, giving prices a short-term boost, according to Flynn and Andy Lipow, president of Lipow Oil Associates LLC, an energy consultant in Houston, Texas. Leadership Change “We’re going to have to wait days and weeks to see how this plays out”, said Lipow. “Especially if we do see in fighting within the Saudi royal family or other domestic issues creep up to take advantage of the King’s death.” The kingdom signaled the change of leadership, Amy Myers Jaffe, executive director of energy and sustainability at the University of California-Davis, said by phone from Davos, Switzerland, citing a Jan. 6 speech that, Prince Salman read on behalf of King Abdullah defending Saudi Arabia’s oil market strategy. “That was a signal to everyone who knew that the king was really sick that Crown Prince was on board with the policy and it isn’t going to change,” she said. To contact the reporters on this story: David Marino in New York at dmarino4@bloomberg.net; Sharon Cho in Singapore at ccho28@bloomberg.net To contact the editors responsible for this story: Pratish Narayanan at pnarayanan9@bloomberg.net Alexander Kwiatkowski