The appointment of a much younger al-Falih to replace the aging al-Naimi, is in keeping with the generational leadership change underway in Saudi Arabia. Producing more oil as Saudi Arabia is doing will act to keep oil prices from soaring even as U.S. and various OPEC member outputs fall. The current rise in oil prices is supported not only by evident production declines around the world, but also by the rise in unscheduled outages such as Canada’ oil sands and oil output from Nigeria’s Delta region. The latter outages are temporary, but they are helping to more rapidly correct the oil inventory glut. That trend is leading to more optimistic outlooks for a quicker balancing of global oil supply and demand. Saudi Arabia will certainly welcome the additional income from higher oil prices, but it is equally concerned with generating more rapid oil demand growth. Until demand growth accelerates, Saudi Arabia will remain locked in an intense battle for market share, especially in Asia, with Russia and the expanding output from a recovering Iranian oil industry. 

The market shock of the replacement of al-Naimi as Saudi Arabia oil minister has worn off. We suggest, however, that people should not be surprised by further policy and leadership changes in the Kingdom. The urgency for royal leadership to put in place the policies and leadership that it believes can successfully navigate the transition of the Saudi economy and its society from one totally dependent on oil to one based on a more diverse industrial and financial foundation is intense. The ability to make that transition will provide greater assurance that Saudi Arabia will not become another failed Middle Eastern state. The world should be rooting for a successful transition even it means moderate oil prices for many years into the future, which will challenge the economies of oil exporting countries around the world. 

Eoin Treacy's view

Here is a link to the full report. 

The oil market remains in a state of flux but the rally has recently been supported by outages at major production geographies which have acted as a bullish catalyst. Nevertheless, none of the outages are permanent in nature and the higher prices move the greater the incentive to speed up repairs. At the same time Saudi Arabia is waging a three fronted war against Iran and the last thing the kingdom wants is to lose market share to its regional nemesis. 

Brent Crude oil remains in a very orderly rebound where reactions have been limited to pullbacks of between $5 and $6. Prices are now trading back above the trend mean and a sustained move below last week’s low near $43.30 would now be required to question the consistency of the four-month advance. 

Goldman Sachs was reported yesterday as taking the view that a deficit is now evident in the crude oil market which is supported by the rebound. However the higher prices move, the greater the incentive to increase supply among marginal producers. In the major US unconventional oil and gas sites, a large number of holes have been drilled that have not been fully commissioned. Therefore the Baker Hughes Rig Count is not the only arbiter of activity but It is a reasonable indicator and it is still declining. This suggests less money continues to be spent on new development. 

The continued advance in oil prices is supporting the energy sector with the result that both Exxon and Chevron are the best performing stocks in the Dow Jones Industrials’ this year. In fact a look at the biggest gainers and losers in the S&P 500 today highlights the role of the energy sector in helping support the Index not least as many other sectors have extended their declines. Oil prices rolling over would remove an important source of demand in what continues to look like a market susceptible to a further correction.