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Saudi Arabia's oil 'maestro' exits as young prince flexes his muscles

Saudi Oil Minister Ali Ibrahim Al-Naimi in Doha, Qatar.
Justin Solomon | CNBC
Saudi Oil Minister Ali Ibrahim Al-Naimi in Doha, Qatar.

The end of Ali al-Naimi's more than two-decade tenure as Saudi Arabia's oil minister signals a new era for crude markets, analysts said on Saturday, and appeared to be a reaffirmation of Saudi policy to let oil set its own pricing.

On Saturday, Saudi Arabia issued a royal decree that replaced al-Naimi with Khalid al-Falih, chairman of Saudi Aramco, as part of a broad reshuffling of the cabinet. The move came as the world's largest oil producer continues to grapple with the fallout from the global bear market in crude oil.

Al-Naimi was the most watched figure in the oil world, and was often described as a "maestro" of the market. His utterances on production levels could swing prices and drive the direction of oil for months.

Last month, a high-stakes summit in Doha between OPEC and non-OPEC producers failed to produce an agreement to freeze output, in what was seen as the product of tensions between Saudi Arabia and Iran. The failure of Doha reinforced what many analysts have said for months: That the oil cartel was quickly losing its ability to set the agenda of world oil markets, and influence prices.

Al-Naimi battled to manage the price of oil throughout his time as minister. In his absence, the Saudis may allow market forces to play a greater role in setting the cost of crude, according to observers.

"What that means is you'll have much more market volatility. You'll have higher highs and lower lows if you don't manage" crude prices, Pira Energy Group founder and executive chairman Gary Ross told CNBC on Saturday.

Al-Naimi was a "stabilizing force," and markets could react negatively to his absence, said Ross, who has known al-Naimi for more than 20 years. Although savvy observers say the aging al-Naimi was ready to vacate his post, the implications of the shake up are still far reaching.

"The Saudi put is gone," Ross added.

'The ultimate disruptor'

Analysts say the ouster underscores the extent to which Deputy Crown Prince Mohammed bin Salman—Saudi Arabia's 30-year old defense minister and a force multiplier behind efforts to reform the moribund Saudi state—has begun to flex his muscles in the country's hierarchy.

"A rather unceremonious end for the maestro of the oil markets," Helima Croft, managing director at RBC Capital Markets and a veteran commodities market observer, told CNBC.

Bin Salman "is the oil market's ultimate disruptor," Croft said. "Al-Falih had been tipped as the man in waiting for months and after the Doha debacle the writing was on the wall for Naimi."

The new oil minister is seen as "a very capable technocrat, but ‎he is unlikely to enjoy the same type of authority to set oil policy as Naimi did under Abdullah," Croft said. Meanwhile, bin Salman is expected to "continue to wage a brutal war for market access against arch-rival Iran and display contempt for collective cartel action to boost prices," she added.

Al-Naimi's departure comes as a deep oil price rout approaches its third year. He was a central architect of the Saudi policy to allow market forces to flush out high-priced production and reduce crude oversupply. It has already helped reduce U.S. output from a high of nearly 9.7 million barrels a day last year to about 8.8 million bpd today.

Now that al-Naimi is out, some experts say the oil market could become even more unpredictable particularly in the hands of bin salman, an unknown who some see as erratic.

"From Naimi's point of view, economics always came first, and managing the markets was of the upper most importance" because oil is such a strategically critical commodity, he said.

The bin Salman factor

Bin Salman was named the chair of the Council for Economic Development Affairs when it was established last year, giving him wide influence over Saudi Arabia's economic future. Earlier this year, he outlined his plan to diversify the economy and reduce its reliance on hydrocarbons.

"The next several years are going to require executing on the deputy crown prince's vision," said Daniel Yergin, vice chairman of IHS. "It's going to require somebody that's there for the long term. Khalid al-Falih is very capable. I think this change reflects preparing for implementing the vision."

The failure of the Doha meeting to reach a deal that would have capped oil production at January levels was obviously an embarrassment, Ross said.

The deal fell apart after bin Salman said Saudi Arabia would not participate unless all OPEC members, including Iran, agreed to freeze production. But Tehran had clearly telegraphed it would not dial down output until its production returned to pre-sanctions levels.

"I think this was sort of the bitter end because this has been a ministry which has never mixed politics and economics," Ross said.