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Why Saudi succession isn’t a big deal for oil

Saudi Arabia's King Abdullah
Getty Images
Saudi Arabia's King Abdullah

News that Saudi King Abdullah bin Abdulaziz Al Saud passed away sent oil prices sharply higher on Friday, but analysts dismissed the move as a knee jerk reaction, noting the recent trend remains intact.

"It's not an extraordinary move in oil prices, given the recent volatility and turmoil in the oil markets," said Michael Levi, senior fellow for energy and the environment at the Council on Foreign Relations (CFR). "Oil prices have dropped 60 percent over the past six months – compared to that, [today's move] is not earth shattering," he said.

Nymex WTI crude oil futures rose as much as 2.5 percent to $47.76 after the news broke but trended back down to $47.25 by mid-day in Asia. Brent crude also rose over 2.5 percent to a high of $49.80 shortly after opening and was recently trading at $49.55.

"It's just the markets pricing in any potential uncertainty over the succession. Prices will settle back down: current levels may hold for a couple of weeks, or whenever the new king comes out and confirms the current policy will be continued," said Phillip Futures investment analyst Daniel Ang.

Uncertainty tends to fuel speculation, which in turn drives up prices, according to Takayuki Nogami, senior economist at government-run Japan Oil, Gas and Metals National Corporation (JOGMEC). He believes prices will trend back down once the markets digest the news; the fundamentals of the oil markets – over-supply in a slowing global economy – won't change, he said.

"[And] the succession in Saudi Arabia itself will be about continuity – in Saudi Arabia, the king makes policy decisions in consensus with other royal family members," he said.

Saudi Arabia led OPEC's decision to maintain its production levels on November, triggering a further collapse in oil prices. Oil prices have plunged more than 50 percent since mid-2014, with Brent at $48.52 a barrel at Thursday's close, and Nymex crude at $46.31.

Read MoreSaudi King Abdullah dies

Still, the real succession is unclear, according to CFR's Levy. Salman is 79 and no one has any good visibility on how the handover of power to the next generation is going to play out, he said. Salman on Friday appointed his half-brother Muqrin as his crown prince and heir.

Bigger, non-Saudi risks lurking

Analysts remain divided on where prices are headed.

"Oil prices are bottoming out and are headed upwards," according to Phillip Futures' Ang. He pointed out that crude futures have stayed below $50 for almost two weeks and sees that as a sign that prices are consolidating. He expects prices to recover to around $60 to $70 towards the middle of the year.

However, JOGMEC's Nogami doesn't see any upside yet and expects oil to stay below $50 a barrel, in the $40 range, for a while. Price catalysts will come from outside Saudi Arabia, he said.

For now, "it doesn't look like other Organization of the Petroleum Exporting Countries will go their own way (and against Saudi Arabia) and reduce production because most of them need the revenues," he said.

"The oil markets show no sign of settling down," said CFR's Levi, citing a laundry list of "medium-sized" potential risks in Nigeria, Venezuela, and Russia.

"Iran, and the nuclear issue, always remains a question mark" too, he added.