Saudi King Abdullah Has Died; Crude Prices Jump

Tyler Durden's picture

After first falling ill  and being hospitalized in December, Saudi Arabia officials have announced:

  • *SAUDI ARABIAN KING ABDULLAH DIES, CROWN PRINCE SALMAN SUCCEEDS: STATE TV

As we noted previously when considering this possibility, "a new King can do (almost) anything he wants, including changing oil policy." 79-year-old Crown Prince Salman has been named succesor (and has his own health issues). Oil prices popped around 80c on the news.

 

 

As we detailed before, Abdullah's 79-year-old half-brother has his own health issues and leaves larger questions over the line of succession in one of the world’s most important oil producers remain unanswered.

 

 

Originally posted at Reuters,

In his annual “state-of-the-kingdom” address on Jan. 6, Saudi Arabia’s King Abdullah hoped to reassure the world that his country is prepared to absorb the economic shock of plummeting oil prices and to deal with the worsening conflict in its two neighbors, Iraq and Yemen. The message might have been more effective had the 90 year-old king delivered it personally, but Abdullah has been hospitalized since Dec. 31 for pneumonia.

 

Instead, Crown Prince Salman delivered the speech on the king’s behalf. That image — of an aging heir with his own health troubles standing in for a nonagenarian king — did little to address concerns about whether Abdullah is still fit to lead. Larger questions over the line of succession in one of the world’s most important oil producers remain unanswered.

 

The 79-year-old Salman, a half brother of the king and his designated successor, has taken on a larger public role in recent months, standing in for Abdullah at a summit meeting of Persian Gulf leaders in Qatar last month. But Salman himself is in poor health, and reportedly suffers from dementia. If Abdullah dies or is incapacitated, and Salman ascends to the throne, he might not be king for long. It’s also unclear who Salman would designate as his crown prince — and that crucial decision could destabilize the royal family.

 

Prince Muqrin, 69, who has served as head of Saudi intelligence and in other senior positions, was installed last year by Abdullah into the newly created post of deputy crown prince, making him second-in-line to the throne. But any new king has the right to choose his own crown prince. If Muqrin is passed over by Salman, that could set off a succession battle within the House of Saud at a time of regional crisis and instability in the global oil markets.

 

Beyond Salman’s expected ascension to the throne, the Saud dynasty faces a larger challenge over succession within its system of hereditary rule. The kingdom was founded in 1932 by Abdulaziz al-Saud, and he left behind a system where the throne is passed from older son to younger son (the king had 35 surviving sons when he died in 1953). With the old generation of Abdulaziz’s sons dying off or passing into senescence, the kingdom has no clear plan to hand power to the “new” generation of royals — Abdulaziz’s grandsons, of which there are at least 30 who could be in line for the throne.

 

Muqrin is the youngest surviving son of Abdulaziz who is still in the running for the throne (he has several older siblings who have been passed over). If Muqrin becomes king, he would have to appoint a crown prince from the third generation of royals. Muqrin does not have strong enough support within the royal family to appoint one of his sons to the post. One theory is that Abdullah positioned Muqrin as second-in-line so that he would be beholden to Abdullah’s sons, one of whom could become king once the generational shift takes place.

Aside from the king’s illness and questions over succession, Saudi Arabia is faced with a series of regional and economic threats.

Most prominently, the kingdom must cope with plunging oil prices. On Jan. 7, Brent crude, the international benchmark, fell below $50 a barrel for the first time since May 2009 — a drop caused in part by Saudi’s refusal to cut high production levels. At the last OPEC meeting in late November, the Saudis led the charge to prevent the cartel from cutting production, which would have driven prices up. Instead, the kingdom is trying to gain more control over the global market, and to drive out U.S. shale oil, which requires higher prices to remain competitive.

 

So far, Saudi leaders have been able to withstand the economic shock by increasing oil production to make up for falling prices, or by accessing some of the kingdom’s $750 billion stashed in foreign reserves. But those are not long-term solutions.

 

The other challenge for Abdullah’s successor will be containing Iran, the kingdom’s regional rival. Saudi Arabia is engaged in proxy battles with Iran in several arenas: Syria, Iraq, Lebanon and Yemen. The kingdom is using oil as a weapon to punish Iran, and Russia, for their support of Bashar al-Assad’s regime in Syria. Facing Western sanctions and economic isolation, the Iranian regime is dependent on oil remaining at $100 a barrel or more to meet its budget commitments.

 

The proxy war has played out most intensely in Syria and Iraq. After the American invasion of Iraq in 2003, neighboring Sunni regimes backed Sunni militants, while Iran supported the Shi’ite-led government and Shi’ite militias. When various Middle Eastern regimes realized that the United States would — in their view — lose its war in Iraq, they began maneuvering to protect their interests and to gain something out of the American withdrawal. Saudi Arabia, which saw Iraq as a bulwark against Iranian influence, tried to destabilize the Shi’ite-led government in Baghdad.

 

The Saud dynasty views itself as the rightful leader of the Muslim world, but Iran has challenged that leadership for several decades. Although Saudi Arabia has a Sunni majority, its rulers fear Iran’s potential influence over a sizable, and sometimes-restive, Shi’ite population concentrated in the kingdom’s oil-rich Eastern Province.

 

Any new leader is unlikely to change the larger contours of Saudi foreign policy — or the kingdom’s use of oil to enforce its interests and try to keep Iran at bay. But the new king and his inner circle will face decisions on succession that could reshape the ruling family and the monarchy’s future for generations to come.

*  *  *

But, 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.

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HedgeAccordingly's picture
guess it is time for .... List of dead bankers 2015 – conspiracy update

http://hedgeaccordingly.com/2015/01/list-of-dead-bankers-2015-conspiracy...

knukles's picture

Lock up your goats, camels and Bacha Bazi boys, for the Wahabbists will cutchur dork off for bad jujus

chumbawamba's picture

Maybe they can liquify the cadaver and feed it by catheter to Ariel Sharon's undead corpse.

I am Chumbawamba.

wee-weed up's picture

I wonder if ISIS is mobilizing as we speak?

SoberOne's picture

Oh they are, in those .gov humvees!

McMolotov's picture

I call dibs on his harem.

Das Capitalist's picture

They're gonna be buried with him.

Liberal's picture

As a staunch liberal, I will patiently wait for Obama's response before I either mourn or celebrate his death. 

Fractal Parasite's picture

Abdullah had a heart attack after the Shia seized power next door in Yemen.

stocktivity's picture

Draghi has to love the timing. Another bullshit rise in the markets tomorrow.

jaap's picture

in 50 million years he will be.... oil.

Liberal's picture

As a staunch liberal, I'd like to make sure that Americans are not distracted by this foreign affair and make sure that every American is paying close attention to the most pressing issue at home: Why did the Patriots deflate football?

fuu's picture

So now we wait for the smoke out the chimney process? I hope he chooses "Corky IX".

BaBaBouy's picture

Something Tells Me We Gots A Lot Of Instability On The Plate In That Region...

Pairadimes's picture

What? No nailgun? Disappointed.

cifo's picture

WOW! Oil price jumped 90 cents!!!!!

Anusocracy's picture

There's just a little bit less pond scum in the world today.

palmereldritch's picture

It is being reported that his last word was, "Frak!"

TruxtonSpangler's picture

I for one am amazed that this article wasnt posted to ZH on Saturday. Maybe there is still a Tyler worth its salt.

SilverIsKing's picture

I hope they gave him the proper burial at sea and dumped his body off the side of a boat.

Anusocracy's picture

"Hey! Why does it smell like brimstone here?"

me again's picture
me again (not verified) Truthseeker2 Jan 22, 2015 10:32 PM

THE USA SUPPORTS A FANATICAL DICTATORSHIP IN WASHINGTON DC !!

Ginsengbull's picture

Deflation is inevitable.

FinalEvent's picture

How did he die? Was it a nailgun?

Tall Tom's picture

Why did the Patriots deflate football?

 

That is easy to answer, Liberal. Don't you know that we are in a Deflationary Collapse? Everything is deflating...even footballs. What's a Patriot to do?

 

Geez.

 

(keep 'em coming...)

me again's picture
me again (not verified) Liberal Jan 22, 2015 10:30 PM

I give up why did your parrot deflate your football ?

jimmytorpedo's picture

THIS PARROT IS DEAD!!

DEAD AS A DOORNAIL

He couldn't possibly deflate your football/oil!

Adahy's picture

He's not dead.  He's just resting 'is eyes a bit.

DaveyJones's picture

and then and only then will his country regain influence 

August's picture

Well, of course.  He was a dinosaur.

Hulk's picture

50 million years from now we ought to have cold fusion , so his oily derivatives be safe...

knukles's picture

Prince Salmon.  Every Thursday is a Prince Salmon Day

Hohum's picture

It's Salman!  Not Salmon!  (Some of you will get the reference.)

WayBehind's picture

Who cares. Salmon sounds better :)

Romney Wordsworth's picture
Romney Wordsworth (not verified) WayBehind Jan 22, 2015 9:49 PM

Salman fishing in the Yemen

effendi's picture

Don't move or the nigger gets it.

(Blazing Saddles)

ForTheWorld's picture

Do you need Salsa with your Salman, or Seltza for your Salmon?

Manthong's picture

No Salsa, but maybe some Matzoh to go with the pink (Salmon) Gefilte Fish for King Salmon.

So what's the entertainment for the coronation.. some nice beheading of women?

 

johngaltfla's picture

As I stated elsewhere on January 3rd:

Salman will succeed but only in title; the Prince Muqrin bin Abdulaziz Al Saud will hold and act with all the power (2nd in line for succession). Salman will hold the honorary and decorative or ceremonial aspcets while the suddenly coronation of the Crown Prince will execute the dirty work. Saudi Arabia will shift radically to the hard core adopting a more anti-American, anti-Shiite policy due to the unrest stirred up by Tehran in the East and South. The GCC will become more militarized and do not act shocked if a Chinese aircraft carrier docks at a Saudi port before an American one ever does again.

 

FWIW, as Muqurin re-organizes the central security structure and military, look for major regional conflicts to begin. Tehran has to be begging for Russian troops to be stationed there now as it was rumored that Muqrin was the one pushing for a "blind spot" in Saudi Air Defense radar to give the IAF a corridor to attack Iran last year. When the US refused to comply with their request, they dressed down our "King" in person as the now departed King Abdullah snubbed Obama while Muqrin and his staff dressed them down for inaction on Iran and Syria.

Long gold is the only play now. Oh, and if you are draft age, you might be fooked because employment may suddenly come to you in the US mail.

Things that go bump's picture

Oddly enough, the emperor Caligula had a co-ruler, Gemellus, a grandson of Tiberius. The poor child didn't last long.

Charles Wilson's picture

'N neither did Claudius' only begotten son, Britannicus.

"I wouldn't eat from Britannicus' plate, Titus.  Those mushrooms look a little stale...".

erkme73's picture

This is what the CIA/US will do to any nation that threatens our oil production...

Broken_Trades's picture

Look at 30 year charts of Iraqi oil production.  Now on those charts mark the gulf wars 1 & 2. 

 

old naughty's picture

Good insight, Broken.

This would imply someone is executing on an agenda, no?

And what changes faced the MENA last few years, Libya, Iraq...IS, Yemen. Wildcards are in place, no?

We predict according to "normal", but everything is un-normal these days, except, of course, changes escalatring...

pelican's picture

Did Putins Jackels get him? Anyway, the price of whIte women just crashed.

Hulk's picture

I hear he got 36 virgins and a mule upon his demise...

Money Boo Boo's picture

probably could make a little league baseball team from the harem

813kml's picture

I'm sure that most are in "like new" condition.

knukles's picture

Yeah right.  Low mileage Bacha Bazi boys.