Saudi
King Abdullah Hospitalization Sends Stocks Tumbling But It's Oil That
Is Suddenly Paying Attention
31
December, 2014
Earlier
today, Saudi Arabia's stock market fell sharply with the Tadawul All
Share Index plunging following a Saudi state TV report that King
Abdullah had been admitted to hospital for tests. As shown in the
chart report, the index tumbled as much as 6% in the minutes after
the Saudi Press Agency report which quoted a brief royal court
statement.
But
while the ill king of the King, aged 90, is hardly news to the
discounting stock market, a few more nuanced interpertation of not
just what happens if and when the King passes away but what Saudi
succession looks like, is much more relevant for oil - especially now
that Saudi Arabia has unilaterally decided to tear apart OPEC in its
push to put US shale producers out of business.
As
Emad Mostaque of EC Strat, accurately observes:
Oil
prices are now at levels that cause real concern on the streets of
Saudi Arabia, with
the prospect of succession the icing on top that has caused retail
investors to take the market down another leg.
This
policy may not make it through a succession period, where public
support and good will is essential, particularly as it has nearly
been 20 years since the last change.
The
new regent could decide to keep existing policy, change it completely
or anything he decides. Similarly he has free reign to realign Saudi
Arabia’s foreign policy as he wishes, which is a discussion for
another time and place, but could have significant regional impacts.
Summary:
King
could change, new King can do (almost) anything he wants, including
changing oil policy
The
Saudi market collapsed 6.5% today on Saudi Press Agency reports that
King Abdullah was admitted to hospital for medical tests.
Ordinarily
this shouldn’t be a big deal and is nothing new, with King Abdullah
having had back surgery in 2012 and spent an extended period in
convalescence in Morocco in the last year. However, having led the
Kingdom for almost 19 years (as of Friday) and at the official age of
90 years old, this report raises the question of eventual succession
once more.
Unlike
Oman, where Sultan Qaboos has been unwell in Germany and his heir
unknown, we know that King Abdullah’s heir will be Prince Salman
bin Abdulaziz al Saud (79), who succeeded Prince Nayef as Crown
Prince in 2012 having been Minister of Defence and Governor of Riyadh
previously. Next in line is Prince Muqrin (69), the youngest of that
generation of Princes, meaning a likely generational jump thereafter.
While
any process of succession should be smooth with the next two leaders
defined (and some strong probabilities as to who follows after),
there is significant uncertainty as to what path Saudi Arabia may
take going forward.
This
is particularly pertinent in the case of Prince Salman, who is one of
the “Sudairi Seven” brothers, children of Hassa al Sudairi and
King Abdulaziz. This group, the eldest of whom was the previous King
Fahd, is extremely powerful politically and economically in Saudi
Arabia. This presents a contrast to King Abdullah, who had no
full-brothers and has balanced various groups in Saudi Arabia with
great kill.
Given
the almost plenipotentiary powers of the King (see article 44
of the Basic Law), Prince Salman could realistically decide to do
almost anything he wants if he deems it in the best interests of
Saudi Arabia.
This
includes matters of spending, where significant sums are likely to be
spent on succession to ensure it goes smoothly and the social
contract in Saudi Arabia is maintained and, more pertinently for
global markets, on oil.
In
the oil market Saudi Minister of Petroleum and Mineral Resources Ali
al-Naimi has in recent weeks, with the support of King Abdullah,
emphasized a shift in Saudi Arabian policy to not cut production and
allow the market to determine where the oil price should go, even if
it means oil falling further from here.
In
our opinion, this is not another step in Saudi Arabia “flooding the
market” for political reasons as a look at collapsing Saudi exports
and premium seasonal differential prices shows, but rather them
captalising on a scenario caused by structural factors causing the
oil price to fall to try to take out significant amounts of oil
investment and ensure a higher price in the future as other producers
can no longer rely on a “Saudi put” to stabilize oil prices on
the downside.
They
have significant flexibility in their budget should they choose as we
outlined here: http://www.ecstrat.com/research/balancing-budgets/
and there are a number of measures they could take (eliminating
subsidies, raising short-term debt for more independent monetary
policy) to weather the storm and improve the economy long-term.
However,
oil prices are now at levels that cause real concern on the streets
of Saudi Arabia, with the prospect of succession the icing on top
that has caused retail investors to take the market down another leg.
This
policy may not make it through a succession period, where public
support and good will is essential, particularly as it has nearly
been 20 years since the last change.
The
new regent could decide to keep existing policy, change it completely
or anything he decides. Similarly he has free reign to realign Saudi
Arabia’s foreign policy as he wishes, which is a discussion for
another time and place, but could have significant regional impacts.
This
uncertainty should normally increase oil prices, but
instead we see them down again today, just
as Libyan civil war over resource control (as discussed here:
http://bit.ly/ecstrat4,
p 13) where production looks to be back at year lows of 200kbpd
versus the 900kbpd that apparently kicked off this rout, actually saw
prices fall again.
It
seems that we are in a complete capitulation period now in oil, as
the sharp decrease in CTFC in the last report shows and with
producers scrambling to try to make up for revenue shortfalls by
selling any stock they can now they feel they can no longer rely on
the GCC, increasing flow to the market and keeping the curve in
backwardation. Consumer demand is elastic, but not instantaneous
(they don’t keep spare tankers for storage being mostly just in
time), leading to a perilous period of dead space.
Given
the lack of availability of credit for anything oil related unless
you’re BP, this may continue for a period, but the lack of
investment and potential shifts in the Middle East over the next
year, coupled with the recent rise in long-dated oil back towards $80
augur for higher prices into 2016 unless we see a significant
slowdown in China next year as JP expects, in which case the path
will be more painful (JP sees $60 as the new normal for oil, a level
he predicted a few years ago)
The
Saudi Tadawul stock exchange is likely to stay under pressure, but we
have previously seen intervention in the market if it falls too far,
something that is likely to be repeated.
With
a likely opening to foreign investors in April, the focus must be on
“value” stocks above all else, with oil names providing the beta
despite their curious earnings profile as unlike global energy names
their feedstock is heavily subsidized, so it’s mostly a question of
how much profit they will make versus swings from losses to profits.
* *
*
And
then there is a different angle, one that perhaps not all is as it
seems, courtesy of some tweets on the ground:
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