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Saudi ouster will send oil prices ‘lower for longer’

The recently announced changing of the guard in the Saudi oil ministry and the news spin around it says it is time to separate political banter and political reality.

The banter is about a big surprise in the dismissal of Ali al-Naimi as Saudi energy minister. The reality is that this move has been preordained for some time now. Why? At 80 years old, a relic of the prior King Abdullah, King Salman having sacked most of the appointees of that regime and the plans for taking state oil giant Aramco to an IPO all put the handwriting on the wall.


Saudi Oil Minister Ali al-Naimi, center right, arrives at an oil-producers' meeting in Doha, Qatar, on Sunday, April 17, 2016.
Jon Gambrell | AP
Saudi Oil Minister Ali al-Naimi, center right, arrives at an oil-producers' meeting in Doha, Qatar, on Sunday, April 17, 2016.

Likely this was known for some time, but for sake of impact positioned as a serious event. In fact, it is a serious event and will likely set the stage for further declines in oil prices.

OPEC has been a divisive cartel since inception: price doves with high oil revenues per capita (led by Saudi Arabia) versus the price hawks (the have-nots such as Iran, Iraq Libya, Venezuela, etc.).

In the aftermath of $100+ per barrel oil prices and with Saudi Arabia having successfully implemented its first phase of market-share recapture, OPEC meetings have become virtually farcical encounters. Divisiveness has grown at a time of political unrest and the price hawks' need for oil revenues. As a practical matter, Saudi Arabia can no longer serve as the arbiter of OPEC, nor does it seem to want to.


Saudi Arabia embarked on its market-share-recapture strategy very late in the game — a clear missed call on what was to develop in unconventional reservoirs. Today however, they remain steadfast in their desire to disenfranchise unconventional reserves around the globe through dictating a price point for crude that even in the best of reservoirs would barely cover direct operating costs, much less provide returns on investment in new wells.

Saudi Arabia's Vision 2030 plan and follow-on statements by Saudi officials point to a desire for growth through non-oil revenues. How? First, generate capital (to invest in non-oil revenue sources) from oil itself – through lower prices. As one of the lowest cost producers in OPEC, they are uniquely suited to that strategic approach. Second, monetize pieces of Aramco.


The new oil minister, Khalid al-Falih, is believed to have been instrumental in turning Aramco's business processes and protocols into a quasi-western model, thus facilitating the much talked-about Aramco IPO. Having accomplished that task, the time had come for al-Falih to become the energy minister and implement a seamless execution of Saudi Arabia's goal to generate more non-oil related revenues.

Will this cure the omnipresent and increasing rifts in OPEC? No, that time has long since passed. Will it facilitate a seamless execution of Saudi Arabia's strategy? Yes. Are the Saudis afraid of neighbors attacking their fields and infrastructure? Of course. However, with the U.S. providing $50 billion of defense-related equipment to Saudi Arabia, they are well justified in believing that for the time being, they are secure within their borders. That is a political reality. The political banter of deteriorating relations with Saudi Arabia is a product of an election year.

"Lower for longer" oil prices? Highly likely. That is the strategic objective of Saudi Arabia. And they have the financial prowess and production capacity to accomplish that goal.

Commentary by Mark G. Harrington, an oil-industry consultant who, over his 35-year career, has served as either founder, chairman or president of seven private and public oil and gas companies. At the previous 1986 industry nadir, he created Energy Vulture Funds and out of that grew two portfolio companies: HarCor in the United States and HCO Energy. From an incubation capital of $1.4 million, the group grew to $358 million when he liquidated it in 1997 along with the funds at a key oil market peak. He is currently organizing an event-driven fund to try to replicate his success in this cycle.

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