Prince and barrel: what is the threat the oil market is the new policy of Saudi Arabia

Interference in the negotiations about the freezing of oil production in Doha, the son of the king of Saudi Arabia Mohammed bin Salman, as reported by The Financial Times (FT), can say that Riyadh refuses longstanding principle not to mix politics and the economy. Analysts believe that the reason for the decision of the Saudis to block negotiations was the conflict with Iran, which entered an acute phase in the beginning of this year. Now participants of the oil market have to follow the opaque politics of the Saudi Royal family, not the balance of supply and demand, believe experts polled by Bloomberg.

Policy against oil

“In Doha it was tied to politics”, — quotes Bloomberg words of oil analyst Yasser Elguindi from Medley Global Advisors, which advises large hedge funds. “The fact that Saudi Arabia seems to have blocked the deal, is an indicator of how its oil policy is determined now by the conflict with Iran,” he agreed in conversation with the Agency, Jason Bordoff, Director of the Center on global energy policy at Columbia University in new York.

As reported by FT, with the failure of Saudi Arabia negotiating oil-producing countries in Doha about the freezing of prices was a Prince Mohammed bin Salman. According to the FT, during the talks on 17 April, the Prince tried to call to revoke the Saudi delegation to the negotiations in Doha, demanding her to return home. Although representatives of Riyadh, still remain, the negotiations failed, the newspaper said.

Even a few weeks prior to the failed talks, Mohammed bin Salman several times said in an interview with Bloomberg that the agreement to freeze production possible only if acceded to by Iran. But representatives of Iran, the negotiations did not come and from the beginning expressed skepticism about them: Islamic Republic, on the contrary, ramping up production, trying to regain the global market share after the lifting of sanctions.

Analysts at Bloomberg are unable to unambiguously answer the question of why Riyadh a few weeks negotiated the draft agreement in Doha, although it was obvious that Iran will not join. According to one version, cited by Bloomberg, the Saudis hoped to use the meeting to put Russia, an ally of Iran in the foreign policy arena, before the choice: either support Iran or the rise in oil prices.

Sunni Saudi Arabia and Shiite Iran — longtime competitors in middle East politics. In the civil war in Syria, supports Iran, including arms shipments, the regime of President Bashar al-Assad, and Saudi Arabia — moderate armed opposition. The Yemeni conflict in Saudi troops, with support from other monarchies of the Persian Gulf war with Shiite rebels-Houthis, in support of which they accuse Iran.

Relations between the two countries deteriorated sharply early in the year, after the Saudi authorities in January, they executed the Shiite Sheikh Nimr al-Nimr accused of incitement. In response, the activists smashed the Saudi Embassy in Tehran, and although the Iranian authorities denied the attackers, Riyadh and its allies broke with the Islamic Republic diplomatic relations. Tehran reacted by imposing an embargo on the supply of goods from Saudi Arabia.

Prince is a technocrat

“Oil markets are understood in terms of Saudi Arabia, now we have to listen Mohammed bin Salman,” said Michael Bloomberg Wittner, oil analyst at Société Générale in new York and a former employee of the CIA. The last word in the negotiations was clearly the Prince, not the Minister of oil Ali al-Naimi, he added.

81-year-old technocrat al-Naimi, occupying a Ministerial post for 21 years, has always been the personification of the pragmatic policy of Saudi Arabia in the world oil market. The oil Ministers accountable only to the king, has always been greater freedom of action, and in spite of political differences, al-Naimi was able to negotiate with Iran about concerted actions on the market, according to Bloomberg. This strategy of Saudi Arabia was followed after the failure of the oil embargo on Western countries in 1973, which caused a sharp drop in demand.

Analysts at Société Générale believe: market participants should “look very carefully” the actions of bin Salman, who became, in fact, determine oil policy of the Kingdom is the Minister of oil. It was a “significant change” for the oil industry, said the authors.

Prince Mohammed, who in August will turn 31, have consistently increased their influence in the Kingdom after in January 2015 on the throne of his father, king Salman bin Abdul-Aziz. When the Prince led the Ministry of defence of the country and initiated a military campaign in Yemen, and also became the Chairman of the Council on economic Affairs and development and the Council controlling the entire economy of Saudi Arabia, including the world’s biggest company oil exporter Saudi Aramco. The oil Ministry last year also accountable to Prince Mohammed.

Uncertain forecast

A possible limitation in the production of the largest importers, which is discussed since the beginning of this year, was a major factor in the growth of oil prices. In January she reached the bottom, but after Russia, Saudi Arabia, Venezuela and Qatar announced the beginning of negotiations about the freezing of production, the price of a barrel of Brent increased by 35%.

Now tensions between Saudi Arabia and Iran will not allow the exporters to agree on limiting production and re-negotiations on 2 June, according to a review of Research BMI of 18 April. “Individual OPEC members do not want and cannot assume the role of stabilizing the manufacturer and maintain oil prices by reducing production”, — the document says. Large producers likely will continue to defend market share, than will reduce or freeze production to maintain prices, said consulting Agency.

However, Barclays forecasts the price of Brent in the second quarter at $36 per barrel and the resumption of price growth in the fourth quarter to an average $43 per barrel amid expectations of reduction of the oversupply. The reduction of investment in production due to low prices creates prerequisites for decrease of supply in the market, said energy Minister Alexander Novak in an interview to “Russia 24” on 18 April.