Although global oil prices briefly spiked after the death of King Abdullah due to market uncertainty, Saudi Arabia has given all signals that there will be no major changes in the country’s strategy at home and abroad.

On Jan. 23, 2015, Saudi state TV reported King Abdullah (pictured) died at the age of 90. Photo: AP

On Jan. 23 Saudi royal officials announced the death of 90-year-old King Abdullah bin Abdulaziz. King Abdullah had ruled Saudi Arabia since 2005, but in the last few years his poor health gave rise to rumors about the King’s abdication or his sudden death on many occasions. Since King Abdullah was admitted to the hospital on Dec. 31, these rumors have appeared on social media almost daily. 

King Abdullah was succeeded by his half-brother, former Crown Prince Salman bin Abdulaziz al Saud, on Friday. Immediately after his accession to the throne, King Salman promised to stick to his brother's political course, thus dispelling any speculations about the possibility of change in Saudi Arabia’s strategy at home and abroad.

“We will, with God’s support, maintain the straight path that this country has advanced on since its establishment by the late King Abdulaziz,” the new king said in a speech broadcast on state television.

Oil markets around the world surged on the news from Saudi Arabia on Friday. Even on Thursday evening Jan. 22, when first confirmed reports of King Abdullah’s death appeared on the Internet WTI oil for March delivery climbed 2.2 percent on Asian markets that were just opening. On Friday afternoon, both Brent and U.S. benchmark crude were showing a 2.3 percent gain. 

The hike in oil prices was a predictable course of events, and a 2.2 percent change is not something unusual. In fact, it has happened at least twice in January 2015. The change in oil prices precipitated by King Abdullah’s death only proves that the market is unstable and is likely to even out in the next few days. 

The market’s reaction to King Abdullah’s death would have likely been much stronger if the established rules of succession had been violated in Saudi Arabia this time. Unconfirmed rumors of King Abdullah’s possible abdication in the last two months were accompanied by speculations that the ailing King might in fact name Prince Muqrin bin Abdulaziz, Deputy Crown Prince, as his successor, thus skipping the candidacy of Crown Prince Salman.

Prince Muqrin is the youngest son of the kingdom’s founder King Abdulaziz al Saud, who was appointed Deputy Crown Prince in March 2014. Muqrin's ascendency to the throne would have produced a larger hike in oil prices driven by expectations of wider changes in Saudi oil policy

This oil price shock was expected to accompany the sad news from Saudi Arabia all along but it is not exactly what global players are expecting to hear from Riyadh now. Oil companies are looking for a change in Riyadh’s policy that allows the oil price to fall freely

Those who expect a major change in Saudi Arabia’s oil strategy will likely be disappointed to see Salman ascend to the throne at this particular time. As already noted, King Salman pledged to continue the political course of late King Abdullah, and oil is an effective tool to implement this policy. 

King Salman is unlikely to cut Saudi oil output due to two main reasons.

First, Salman has been replacing King Abdullah and chairing government meetings for several months prior to the King’s death, which means that he was part of the political elite that decided not to cut Saudi Arabia’s oil output in the face of plummeting oil prices

Second, on Friday, Saudi state TV reported that King Salman is keeping Oil Minister Ali Al Naimi in his post. Al Naimi was the one who led OPEC’s Nov. 27 decision not to cut oil production and whose resignation would have been regarded as a major indicator of changing oil policy. 

The Saudi Oil Minister is the one who is pursuing a policy aimed at eliminating competitors with high break-even oil production costs from the market. In his recent  interview with Middle East Economic Survey, Al Naimi said that countries with an inefficient oil industry do not deserve a share of the market, and specifically mentioned West Siberia fields where oil wells are declining in output

It has been  reported recently that Al Naimi met with Russian officials in November 2014 to try and convince them to cut Russia’s 10 million barrels of daily oil production by 250 thousand barrels. Russia, however, turned down Al Naimi’s plan due to the possible closure of oil wells affected by the decision. The failure of these talks with Russia reportedly led to OPEC’s Nov. 27 decision.

Today Saudi Arabia has some of the world’s lowest oil production costs of $10-$20 a barrel (or even $4 to $5 a barrel, according to some estimates) and sufficient cash reserves to withstand the oil crisis, thus Riyadh has no incentive to cut its production levels. King Salman may in fact choose to further increase oil output from about 9.2 million barrels per day today, which will certainly force the price of crude oil even further down.

There are, however, concerns over King Salman’s health. The 79-year-old King reportedly survived a stroke and is suffering from Alzheimer’s. Judging by how oil prices reacted to late King Abdullah’s health reports, those of his brother may become one of the many factors originating in Saudi Arabia that affect the future path of global oil prices. 

The opinion of the author may not necessarily reflect the position of Russia Direct or its staff.