Loose cannon

May 9, 2016 10:02 AM

Ali al-Naimi, the Saudi oil minister, was fired, adding uncertainty and more risk to oil prices.

Ali al-Naimi who started at the bottom at Saudi Aramco and worked his way up to the top not only became the Saudi Oil minister but the real leader of the OPEC cartel, and in reality was the most powerful man in oil. In some ways he was the global oil market.

Al-Naimi almost brought respectability to OPEC and ran the cartel more like a central bank of oil. This is the reason I dubbed him the Alan Greenspan of oil, a name he was asked about in an interview and seemed to relish. During the Persian Gulf Wars, Naimi could be counted on to raise oil output to shield the globe from a price spike even when the Kingdom did not agree with U.S. policy.

At other times, he put the best interest of the cartel first in times of economic uncertainty by cutting production when the global economy was falling apart. Naimi was a business man that rallied against using oil as a political weapon and using oil production levels to try to stabilize prices.

A new king and a possible disagreement with Prince Mohammed bin Salman on Saudi Arabia's energy policy probably led to his demise. Ali Al-Naimi was instrumental in working on a production freeze only to be thwarted by Prince bin Salman at the last minute in Doha. The Prince seemed to hold real power and probably wanted to snub Iran, who decided not to show up at the meeting despite the fact that all of the major participants at the meeting believed that they were there to just sign the deal that was already agreed to. He has been replaced by Khalid Al Falih the CEO of Saudi Aramco, but in reality it will be Prince bin Salman that will be calling the shots.

The worry is that Saudi Arabia will be more of a loose cannon and will lack the credibility that they had built up in recent years. While Mr. Falih said in a news release that the country would "remain committed to maintaining our role in international energy markets and strengthening our position as the world's most reliable supplier of energy" the market will want more proof. So far the market is worried that now the Saudis are more likely to use oil as a political weapon and will be a less reliable supplier.

Oil prices are getting support from the wildfires in Canada, falling U.S. oil output as well as Chinese oil import data.

China's oil imports increased by 13.4% year over year to 7.3 million barrels a day in the first quarter. China’s crude imports rose 7.6% on-year last month close to 7.9 million barrels a day in April.

The Canadian Oil Sands fires in Alberta continue as it is being reported that as much as one-quarter (1.15 million barrels per day) of Canada's oil production (4.6 million barrels of oil per day) is off-line due to the fire in the heart of Canada's oil sands area in Alberta. This has caused at least three oil firms to declare force majeure on oil deliveries

This comes as U.S. oil rig and oil production output continue to fall. On Friday, Baker Hughes reported that the U.S. oil rigs count fell for a seventh straight week, falling four to a total of 328 down 80% from the high in 2014.The total U.S. rig count fell by five as the natural gas rig count fell by one rig to 86. Falling U.S. output in North Dakota and Alaska should accelerate production drops.

Oil prices are consolidating for a longer term move higher. We continue to look at this a generational low oil and we recommend position for a long term move. Short term the risks are more from economic uncertainty, but the impact from the lack on investment will catch up to the market over time.

About the Author

Phil Flynn is a senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. Phil is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets.