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Oil’s Sensitivity to Saudi King’s Death May be Short-Lived

Markets

Oil’s Sensitivity to Saudi King’s Death May be Short-Lived

Flag of Saudi Arabia on blackboard

Chalky saudi arabia flag painted with color chalk on old blackboard

One of the most interesting points of difference between the global oil market nowadays and how it behaves historically is its sensitivity to geopolitical news. Prior to the current oil crash, it only takes some saber rattling from Iran or some turbulence in some parts of the Middle East to quickly send the price of oil spiking up. This hasn’t been the case recently. The turbulence in Yemen and Libya haven’t done much to cause an upward tick in the global price of crude. Moreover, the spread of ISIS-controlled areas in Syria and Iraq hasn’t really put much upward pressure on the price of global crude. What gives?

Thanks to the twin price-depressing facts of soft global demand and a huge supply glut courtesy of US shale oil and Canadian tar sands, the price of oil seems stuck at the $50 range. Well, the recent reaction of the oil market to Saudi King Abdulaziz’ death has given some oil hawks a glimmer of hope. It appears that the market is beginning to regain some of its historical hair trigger sensitivity to local political developments.
Why is the Saudi King’s passing trigger an oil price uptick? The death of King Abdulaziz, it is thought might trigger a policy struggle in the inner circles of Saudi Arabia’s oil policy making centers of power. The current gambit of the House of Saud is very risky to say the least. Keeping OPEC’s oil taps flowing in a bid to wrest market share from North American producers might be a long-term struggle if North American extraction technology levels up productivity to compensate for lower prices. Saudi Arabia’s state budget is heavy on subsidies and the relaxation of these due to lower oil revenues might trigger social unrest.
It is thought that there might be dissenting voices in Saudi Arabia that would push for production cuts to bolster global oil prices. The upward tick in the price of oil is an indication of hope that dissenting opinions in Saudi Arabia’s oil policy power circles might prevail. Even if they did, the short to mid-term price of oil might still be depressed due to lower global demand due to a soft global economy. Moreover, if oil prices start inching toward $100 per barrel again, shuttered North American shale fields can be reactivated and there would be downward pressure on oil once again.

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