Saudi Cabinet reshuffle: What’s behind it and what will it lead to on oil market?

Saudi Cabinet reshuffle: What’s behind it and what will it lead to on oil market?
The removal of Saudi Arabia's long-serving oil minister is a continuation of the Deputy Crown Prince’s consolidation of grip on power; the move is likely to lead to more confrontation with Iran, says Amir Handjani, lead Director at RAK Petroleum.

The dismissal of Saudi Arabia's veteran oil minister Ali al-Naimi, has cast uncertainty over global energy markets. He was replaced by Khalid al-Falih, chairman of the state oil giant Saudi Aramco.

RT discussed with energy expert Amir Handjani the Saudi reshuffle and its meaning for the global oil market.

RT: The outgoing minister was seen as the oil market's most influential figure. What is behind the decision to dismiss him?

Amir Handjani: I think it is a continuation of the Deputy Crown Prince Mohammed bin Salman’s consolidation of his grip on power. He has tried to make some transformative changes in Saudi Arabia; a lot of them have been proclamations so far. Nothing substantive has happened, except he’s reshuffled the deck with the Cabinet.

RT: Reacting to the dismissal, OPEC officials said a deal to freeze oil production is less likely now. What is going to come out of the OPEC talks which are due in June

AH: Probably, not much. I think what we have right now in OPEC is a continuation of the Saudi-Iran rivalry manifesting itself in the oil markets. Saudi Arabia wants to keep Iran in the penalty box, wants to deny the market share that it had pre-sanctions. So, this freeze that they are proposing doesn’t work for the Iranians because what they are saying is: “Freeze your production to what it was at the pre-sanctions level.” And Iran simply isn’t going to do that. Right now that the sanctions had been removed, they are increasing their market share, they are going out there and bring back old customers they had before. And Saudi Arabia wants to deny them that. As long as Saudi Arabia continues that policy of trying to freeze production, the Iranians will never sign on onboard and the rest of OPEC will be by the sidelines and nothing will really happen.

RT: Is it possible that we might see some sort of change in the Saudi oil policy now as the minister being pushed out?  

AH: Probably not, I think we will see more the intensification of that Saudi-Iran rivalry. It is clear that Mohammed bin Salman wants to confront Iran not just in the Middle East but in energy markets. I don’t see a situation whereby he is going to back down. And certainly the Iranians are not going to back down either.

RT: The Deputy Crown Prince of Saudi Arabia recently said that “the monarchy doesn't actually need high oil prices, it's not their battle.” Would you agree? How badly is Saudi Arabia hit by low prices?

AH: Oil revenue accounts for something like 80 percent of Saudi Arabia’s revenue, [according to the] IMF in 2015.  They absolutely need high energy prices. Right now they are running deficits of about $100 billion a year. They are going into the international credit markets and raising debts. This Vision 2030 should be commended. It is a wonderful vision, it is going to take the Saudi equivalent of a moon landing to diverse themselves from oil.

RT: When do you forecast the oil prices might return to some sort of normality?

AH: It is difficult to predict. I think we are in for another 24 months of a band right now between $30 and $50. Right now we have excess crude, it really is a buyers’ market, we have excess crude of about 2 to 3 million barrels a day. Many oil producers are going around the world enticing customers with discounts. I don’t see it changing until we see global growth coming back, we see growth in Europe, growth in North America, certainly growth in Asia. With more growth, more users of oil and prices tend to rise then. Right now we are in the era of stagnant growth around the world, and you are going to see stagnant oil prices.

The statements, views and opinions expressed in this column are solely those of the author and do not necessarily represent those of RT.