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Realm of uncertainty in Saudi Arabia

Rarely has Saudi policy, across all spheres, been less predictable. Its reaction to a spate of terror attacks inside the kingdom may worsen this

Saudi Arabia, once a soothing presence for the world's oil market, is becoming another source of anxiety all on its own.

Plans for economic transformation have arrived in recent months with a refreshing air of transparency - and yet offer little real direction, an array of impossible-to-meet targets, and a mishmash of aspirations.

The Aramco initial public offering looms over oil policy and confuses the kingdom's messages to the market. Does Saudi Arabia want a higher oil price, so Aramco's value is greater? Is the company instead to keep chasing volume and market share? Or is the kingdom so convinced that the market is fi­nally rebalancing that it thinks Aramco can get both - higher prices and more custom?

One month, deputy crown prince Mo­hammed bin Salman talks of expanding pro­duction capacity to 20m barrels a day; the next comes the message that today's 12.5m b/d is enough. April sees the Doha debacle crush hopes of a producers' freeze; June sees Saudi Arabia's new oil minister, Khalid al-Fa­lih, seeking supply-side coordination behind the scenes at the Opec meeting.

Now a string of terrorist attacks in the kingdom, probably carried out by Islamic State or its local fans, adds more uncertainty to assessments of the kingdom's direction. The location of the attacks - one close to the US consulate in Jeddah, another targeting Shia in the Eastern Province and another near a holy mosque in Medina - and their timing on the eve of Eid are symbolic. Some see it as a declaration of war on the Saudi regime and its legitimacy.

The attacks also reveal the underlying security risks in the kingdom. The reaction is unpredictable

The attacks also reveal the underlying se­curity risks in the kingdom. The reaction is unpredictable. A crackdown of the kind that followed the al-Qaida compound bombings in 2003 is plausible. Will crown prince and interior minister Mohammed bin Nayef ex­ecute this, while his rival MbS pursues his Thatcherite revolution?

The crude truth is that no one can an­swer these questions, or predict Saudi policy, satisfactorily now. Consider the "National Transformation Program 2020" document, a cornerstone of the grand Saudi Vision 2030. Applaud its aspirations and its openness about some Saudi failings (40% of citizens in the world's biggest oil export­er don't have sewage facilities, for example). But if you wanted a realistic blueprint, dis­count the document from your calculations. All told, it gives 24 government ministries 346 targets between them, and lists 534 ini­tiatives to be carried out in the remaining months of 2016. The mid-term (2020) tar­gets include such gems as increasing from 3% to 10% the "positive media content re­garding the kingdom" and, more seriously, a near-doubling in just four and a half years of the value of non-oil Saudi exports.

Mohammed bin Salman and his advisors are behind this radical plan to overhaul one of the world's most conservative countries. The deputy crown prince's future, in other words, may depend on its success. What happens when many of the huge number of unrealistic targets are not met?

As for oil policy, Saudi Arabia's messages lately have been sphinx-like. Falih says the oil market is rebalancing, a message that im­plies the kingdom should just stick with its plan to keep pumping. Yet behind the scenes in Vienna in June he and his officials were involved in genuine efforts to cobble some kind of supply-side deal together.

Risk unfolds

The smartest analysts of Sau­di policy have always maintained that the kingdom would only consider a return to supply-side management - cuts - when the market was already providing some cyclical lift itself. That is, it would wait to start push­ing against a door that was already opening.

That seems likelier now than it has in the past two years. Falih says the oversup­ply has "disappeared". Aramco followed up by raising some of its official selling prices (OSPs) in Asia. And then, spooked perhaps by weaker pull on its crude, it promptly low­ered some of them too.

As Iran's production recovery reaches a plateau, Opec cooperation is now plausible because the faultline that ended the Doha freeze track - Iran's intent to keep increas­ing supply - is disappearing. Iranian pro­duction, which reached 3.64m b/d in May, may have peaked for now. Its exports already seem to have fallen in June.

Saudi officials might be happy to let the market think it will be a more active manager again, or even talk up those prospects. But watch the actual supply data, which may tell a different story

But follow the numbers. Saudi produc­tion rose to 10.25m b/d in May, maintaining a long period of strong supply, and probably edged higher again in June to satisfy domes­tic power generation needs. It seems doubt­ful that the kingdom would make room for more oil from, say, Libya or Nigeria in the coming months.

Saudi Arabia does not want to cut ex­ports - a policy red line. In short, its officials might be happy to let the market think it will be a more active manager again, or even talk up those prospects. But watch the actual supply data in the coming weeks, which may tell a different story.

Above all, Saudi oil policy must now be seen at least partly through the prism of the Aramco IPO, a central plank of Mohammed bin Salman's transformation agenda. The quest for a good valuation will dictate the tactical manoeuvring that has always been a feature of Saudi oil-market policy. But does that mean cutting supply or pushing more of it? No one is saying.

And, in turn, watch the political dynam­ic in Riyadh unfold following the shocking terrorist acts. They may pass with little re­sponse beyond a beefing up in security and a clamping down on Jihadist funding groups, as other similar attacks in the Eastern Prov­ince have.

But what if the violence sparks a new re­actionary turn in the regime, led by Prince Nayef. Would the broad reform plans or the big painful, economic transition en­visaged in the vague Saudi Vision package survive? Would unpopular fuel subsidy cuts be scrapped? Saudi policymaking has never been less predictable than it is now.

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