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This Week In Energy: New Saudi King Can’t Save Oil Prices

January 25, 2015

This Week In Energy: New Saudi King Can’t Save Oil Prices

The major news story breaking in the oil space today is the passing of Saudi Arabia’s King Abdullah and the succession to the throne of King Salman bin Abdulaziz Al Saud. This comes at a time when oil prices have fallen over 60 percent since June 2014, aided substantially by OPEC’s decision in November not to cut crude oil production. In recent months, the rhetoric from Saudi Arabia’s oil minister Ali Al-Naimi has been that the Kingdom, home to more than a fifth of the world’s crude oil, would not intervene and instead allow the markets to decide the price of oil. However, traditionally, incoming kings have opted to appoint new ministers to key ministries such as oil and finance. While Al-Naimi has expressed his desire to retire soon, this is not expected until sometime after the June meeting of OPEC, a key catalyst for oil price recovery in 2015.

At present, the Saudi budget, which depends on petroleum exports for 85 percent of its annual revenues, balances at around $63 a barrel. This may partly explain Saudi Armaco’s latest decision to diversify its operations by, “investing big in gas,” at a field near Jordan according to its Chief Executive Officer Khalid Al-Falih. With oil prices hovering around $46 this morning and many predicting a prolonged period of depressed prices, Saudi Arabia will be forced to dip into its $800 billion dollar cash reserves to handle the largest deficit in its history of $38.6 billion. These domestic, fiscal problems, the oil price situation, coupled with regional conflicts and even minor ISIS incursions on the Saudi Arabian border all signal a baptism of fire for Saudi Arabia’s new King Salman.

Meanwhile, two fellow OPEC members are facing their own unique set of challenges. Firstly, Iraq has reportedly lost around 50 percent of its revenues from oil exports and has consequently had to boost output to record levels just to stay afloat, according to Bloomberg. This move saw OPEC’s overall output rise by 80,000 barrels a day last month reaching a total of 30.48 million, with the drop off in Libyan supply being covered by Iraq and then some. While some stability has returned to Iraq following a deal with the Kurdistan Regional Government, according to Iraqi Prime Minister Haidar al-Abadi, the loss of oil revenues greatly impedes the fight against ISIS and threatens the Iraqi oil industry’s long-term survival and ability to maintain capacity at such high levels.

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