Energy

Julian Lee is an oil strategist for Bloomberg First Word. Previously he worked as a senior analyst at the Centre for Global Energy Studies.

Mohammed bin Salman's ascension as Crown Prince of Saudi Arabia could lead to a more assertive Saudi oil policy within OPEC, as the kingdom puts its own needs first. Expect Iraq to follow Qatar as its next target.

The elevation of the king's son is no surprise. Having already handed him the reins to guide the country forward, it would have been odd indeed if the king didn't ensure his son could continue his policies.

Prince Mohammed, or MbS as he is known widely, has already pursued a robust regional strategy and will probably intensify as his power grows. He's led a military campaign against Iran-backed Houthi rebels in Yemen and, more recently, has been central to the isolation of neighboring Qatar.

In oil, Saudi Arabia has already shown itself willing to pursue its own interests over those of its neighbors. Two oil fields shared with Kuwait, with a combined daily production capacity of some 500,000 barrels, have been shut since late 2014 and early 2015 and show no sign of being reopened, despite repeated statements from the Kuwaiti side that their restart is imminent.

Oil Under MbS
While Mohammed bin Salman has been responsible for oil policy, prices have struggled
Source: Bloomberg

Saudi Aramco, the state-owned oil company, says the shutdown of the offshore Khafji field was triggered by environmental concerns, but some in Kuwait see the prolonged closure as payback for the emirate's unwillingness to supply troops in Yemen.

Sanctions on Qatar result from claims that the emirate has been funding terrorist groups and is too close to Iran. Qatar denies these allegations and is still waiting for a list of specific Saudi demands. It sees the sanctions -- which include restrictions on tankers carrying Qatari oil and gas -- as an attempt to undermine its independent position on big regional issues, or even to bring about regime change.

Saudi regional policy under Prince Mohammed has been characterized by a far harder stance against Iran and its spreading influence. That's unlikely to change.

There's another big country falling under Tehran's sway: Iraq. Iran-backed militias, along with Kurdish counterparts, have been at the forefront of driving back Islamic insurgents in the country. Bilateral Iraqi-Iranian trade has increased every year since 2003, according to a report in the Tehran Times.

By chance, Iraq is also the OPEC member that's most exceeding its agreed crude output target. That puts it in line for stronger criticism from Saudi Arabia as oil prices languish near levels not seen since the group adopted its output target back in November.

Iraq's Over-production
Iraq is lagging other OPEC members in meeting pledged output cuts
Sources: OPEC, Bloomberg
Note: Over-production based on OPEC Secondary Source output estimates

OPEC's overall compliance with the production limits is better than for any similar deal in its history, but that's largely down to Saudi cutting much more deeply than agreed. That willingness to bear more of the burden probably won't persist, particularly if we eventually start to see a more balanced market and higher prices.

Even the tensions in the Middle East, which would usually send oil prices rocketing, have had little impact so far. A more aggressive Riyadh might well see traders starting to price the political risk again. Even more so if Iraq becomes the next Qatar.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Julian Lee in London at jlee1627@bloomberg.net

To contact the editor responsible for this story:
James Boxell at jboxell@bloomberg.net