How Saudi Arabia’s internal politics sent oil price soaring
There are strong indications that the increase in crude oil prices last week which moved to above $60 per barrel may have been occasioned by internal politics of Saudi Arabia.
This was because Mohammed bin Salman, Crown Prince and heir to King Salman, was granted control over a wide-ranging anti-corruption committee and immediately used his new power to consolidate his position.
Eleven former ministers and dozens of Saudi princes were arrested or detained on charges of corruption, graft or financial malfeasance.
The crackdown by the Crown Prince is largely seen as a move to consolidate power before he assumes the throne later this year or next. It is nevertheless a shocking move by the Saudi royal, one that will have big repercussions on the country’s oil industry.
The short-term outlook was bullish, this is because Prince Salman is seen as a key supporter for the OPEC policy of measured production cuts, and his consolidation of power means the cuts are likely to be maintained and extended through the rest of next year.
Conversely, rising prices may also signal increase instability in Saudi Arabia: there are signs that the crackdown may have been meant to stave off a more substantive challenge to him from upper-echelon figures in the Saudi hierarchy.
The uncertainty in future Saudi oil policy has created a bull market. While he is known to favour an extension of production cuts, the turmoil within the Saudi ruling elite could signal a shift in policy in advance of the November 30 OPEC meeting in Vienna, where an extension to production cuts is expected to dominate the agenda.
Another factor influencing soaring crude price is the anticipated sale of Saudi Aramco, the state oil company and quite possibly the world’s most valuable company.
Prince Salman has championed the move to put part of Aramco up for sale, using the proceeds to fund a massive economic development project known as Vision 2030. He has argued that with “lower for longer” prices in the global oil market and an uncertain future, the Saudi economy must be diversified away from reliance on oil and natural gas production.
However, the Federal Government of Nigeria has decided not to be tricked by the soaring oil prices by putting the crude oil price benchmark in the proposed 2018 budget at $45 per barrel.
With prices above $60 per barrel, there are legitimate concerns that the solidarity among OPEC members may begin to weaken. Higher prices will encourage over-production and shale gas production may further be encouraged and the soaring oil prices may be short-lived.