Home / News / World /  Oil price advance seen fleeting after Saudi King Abdullah’s death amid supply glut


New York/SingaporeLondon: The increase in oil prices after the death of Saudi Arabia’s King Abdullah will probably be temporary amid an oversupply in the crude market.

Brent, the global oil benchmark, climbed as much as 2.6% on Friday while US marker West Texas Intermediate jumped 3.1% after the king’s death was announced by the Saudi royal court. The new King Salman bin Abdulaziz, Abdullah’s half-brother, said he will maintain the policies of his predecessor, in a speech on Saudi national television. Oil minister Ali Al-Naimi will remain in his post, a royal decree announced.

Saudi Arabia, Opec’s biggest producer, has led the group’s strategy of maintaining production levels amid a 58% drop in crude since its peak in June. While smaller producers including Venezuela called for action to prop up prices, Al- Naimi highlighted the need to preserve market share amid signs of slowing growth and as the US 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 63 cents lower at $45.68 at 1:14 p.m. in New York. Brent on the London-based ICE Futures Europe exchange rose as much as $1.28 to $49.80.

Price volatility

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% of gross domestic product this year, HSBC said.

The Organization of Petroleum Exporting Countries (Opec) 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 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 US 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 no tangible evidence to suggest that Saudi Arabia will veer away from existing policy of keeping oil output steady in the face of growing US shale oil supply," Harry Tchilinguirian, head of commodity markets strategy at BNP Paribas SA, wrote in an email. A “smooth transition" is the most likely outcome as King Salman “was already actively involved in policy-making behind the scenes", he said.

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 Andy Lipow, president of Lipow Oil Associates LLC, an energy consultant in Houston.

Leadership change

“We’re going to have to wait days and weeks to see how this plays out," he said. “Especially if we do see in-fighting within the Saudi royal family or other domestic issues creep up."

The kingdom signalled 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. Bloomberg

Jessica Summers and Christine Harvey in New York, Dan Murtaugh in Houston, Lynn Doan in San Francisco, Ben Sharples in Melbourne, Ann Koh in Singapore, Tsuyoshi Inajima in Tokyo and Grant Smith in London contributed to this story.

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