Mon, 16 Sep 2019

In June last year, a crunch OPEC meeting was on the edge of collapse. Iran had threatened to storm out and sink a deal on production quotas, accusing the Saudi Oil Minister Khalid Al-Falih of trying to steal market share.

Enter Al-Falih's deputy, an urbane OPEC veteran who'd worked with Iranian Oil Minister Bijan Zanganeh for decades. He put his diplomatic skills to brokering the kind of fudge that's seen the group through many difficult meetings and the next day his boss was able to tell the world the kingdom's oil policy remained on track.

The understudy is now playing the lead. Late on Saturday night, Al-Falih was removed and replaced as energy minister by Prince Abdulaziz bin Salman. A half-brother of Crown Prince Mohammed bin Salman, he's the first member of the royal family to hold the job.

While putting a prince in charge of oil policy is unprecedented, Abdulaziz is no novice. He's devoted most of his adult life to understanding the global energy market and fine-tuning Saudi Arabia's role as the world's largest oil supplier. After studying management at King Fahd University in Dhahran, he first became an adviser in the energy ministry in the late 1980s. He's attended dozens of OPEC meetings and played a key role in negotiating a deal that cleared a global crude glut after the 1998 Asian financial crisis.

Now in his fifties, the prince is known for his perfectly cut suits, soft-spoken style and impeccable manners. He recently led talks with Kuwait to restart long-closed fields in an area where the two countries share sovereignty.

"The new minister is highly experienced and knows his subject better than just about anyone in the country," said Joseph Kechichian, senior fellow at the King Faisal Center for Research and Islamic Studies in Riyadh.

In his first public appearance as minister, Prince Abdulaziz signaled no radical change in Saudi oil policy. Riyadh will continue to back the OPEC+ coalition that combines Russia and other producers with members the Organization of Petroleum Exporting Countries. Saudi Arabia wants higher prices, but realizes the U.S.-China trade war and fears of an economic slowdown have started to slow demand and hit market sentiment.

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"There is nothing radical in Saudi Arabia, we all work for the government, one person comes, one person goes," he said while attending an energy conference in Abu Dhabi. "Fundamentally, Saudi Arabia's energy policy is resting on few pillars. The pillars don't change."

Different style

But the style of Saudi Arabia's oil-market management is likely to be different. Al-Falih talked to the market a lot, frequently appearing on business TV channels and holding regular press briefings after OPEC meetings, a strategy that ran the risk of diminishing returns. He was prone to using central banking tropes like "whatever it takes" in attempts to jawbone prices higher.

Prince Abdulaziz is likely to revive the more restrained communication style of Al-Falih's long-serving predecessor Ali Al-Naimi, making fewer, but more meaningful public announcements, according to a person who's known the prince for several decades, but asked not to be identified discussing private conversations.

"We expect to see less verbal interventions from the new minister," Yasser Elguindi, market strategist at Energy Aspects, said in a note to clients on Sunday.

Al-Falih's biggest achievement of his three-year term was managing OPEC's agreement with Russia, which saw the world's No. 2 exporter agree to formal curbs on production for the first time as the global oil market adjusted to a flood of American shale oil. Prince Abdulaziz is fully supportive of the Russian alliance, but is likely to put more emphasis on relations with OPEC members, according to a Saudi official briefed on the government's thinking.

Diplomatic network

The prince's unparalleled diplomatic network may help soothe relationships frayed by Al-Falih, who often seemed impatient with OPEC members unable or unwilling to contribute meaningful oil production cuts. Al-Falih was so focused on his relationship with his Russian counterpart Alexander Novak, traditional Saudi allies like Kuwait sometimes felt marginalised.

"We expect under his leadership, he will continue where Khalid Al-Falih left" off, OPEC Secretary-General Mohammad Barkindo said in an interview on Monday in Abu Dhabi. "He is a bridge-builder, he's an astute diplomat."

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The prince will have a far narrower remit than his predecessor. As well as being responsible for oil production policy, Al-Falih was chairman of state oil company Aramco and led planning for its IPO. He was also in charge of the kingdom's industrial development. Aramco is now chaired by the head of the sovereign wealth fund and the industrial portfolio rests with another minister.

Even with more time to focus on the oil market, Prince Abdulaziz will confront the same tough challenges as Al-Falih. Crude prices have stabilized around $60 a barrel, about $20 below what the kingdom needs to balance its budget. The surge in U.S. shale production over the last five year has put Saudi Arabia and its allies on the back foot, forced to concede market share to shore up prices. Now the trade war is putting pressure on demand, prompting analysts to ask whether further output cuts will be necessary next year.

Different generations

His relationship with the crown prince will be critical. They come from different generations -- MbS is more than 20 years younger and Prince Abdulaziz had never been seen as part of his inner circle. During the early years of his half-brother's ascendancy, Prince Abdulaziz was less involved in policy making and spent long stretches outside the kingdom. But the prince's more prominent role in the last two years -- active at OPEC meetings and leading talks with Kuwait -- suggests they'd become closer in the run-up to his promotion.

Despite MbS's attempts to diversify the economy away from oil, the crude price remains the single most important influence on the health of the Saudi economy. A challenging oil market may test ties between between the two princes.

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