Oil markets want to see the 'strength' of Saudi Arabia's commitment to OPEC deal: RBC's Croft

The sun sets beyond crude oil storage tanks at the Juaymah tank farm at Saudi Aramco's Ras Tanura oil refinery and oil terminal in Ras Tanura, Saudi Arabia, on Monday, Oct. 1, 2018.

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All eyes will now be on Saudi Arabia's new energy minister to see if the country will stay the course on stabilizing global crude markets, oil market expert Helima Croft said Monday.

This follows news that Saudi Arabia's King Salman has replaced Energy Minister Khalid al Falih with one of his sons, Prince Abdulaziz bin Salman.

Croft, the managing director and global head of commodity strategy RBC Capital Markets, told CNBC that the appointment was "incredibly significant" for the oil market.

"A lot of people in this market who have covered energy for years know Prince Abdulaziz very well. He is the ultimate technocrat, he has spent more than three decades in the (energy) ministry, working on energy issues," Croft said.

Prince Abdulaziz is a long-standing member of the Saudi delegation to OPEC, a group of oil producing nations ostensibly led by Saudi Arabia. He is not expected to change Saudi Arabia's approach to oil policy or OPEC, including the current agreement between OPEC and non-OPEC producers, including Russia, to curb supply in order to support prices and balance oil markets.

Strength of commitment to OPEC cuts

On Monday, attention will be focused on the new minister — who will now be one of the most influential figures in the global oil industry — as he is attending the 24th World Energy Congress in Abu Dhabi, alongside other ministers, CEOs and financiers. Croft said oil watchers will want to hear if Saudi Arabia will stay the course to rebalance the markets.

"Will they continue to want to work with Russia? What do you do with countries whose compliance (with OPEC supply cuts) has be challenged (like) Nigeria and Iraq. He has a really important challenge today to come out and reassure the market that Saudi Arabia remains committed to this," she said.

Investors and producers alike want to be able to gauge the strength of Saudi Arabia's commitment to a late-2016 deal between OPEC and non-OPEC partners, a group now known as "OPEC+."

The agreement sees the alliance aiming to curb oil supplies by around 1.2 million barrels per day — although some producers have adhered to cuts better than others. The deal has been extended several times and is now due to last until March 2020. Prince Abdulaziz was one of the architects of the deal, hence he's expected to continue to support it

OPEC at mercy of Trump's tweets

The OPEC+ agreement faces uncertain times, however, as it confronts a resurgent U.S. shale oil industry adding supply to the market. There are also geopolitical uncertainties, most significantly the Sino-U.S. trade war, that could upset the demand outlook.

"We're really looking to hear the strength of the commitment (to the deal) — how much is Saudi willing to bear the burden of adjustment? How much are they willing to basically whip the other members of the producer organization to get their compliance together?" Croft said, adding that Prince Abdulaziz was "up to the challenge."

Oil prices continued to rise on Monday on expectations that Saudi Arabia will continue to support output cuts. Benchmark Brent crude was trading at $62.19 per barrel while U.S. West Texas Intermediate (WTI) was trading at $57.18 per barrel.

Croft believes market fundamentals are improving but said that oil markets could be at the mercy of other factors — such as President Donald Trump's approach to trade policies, much of which he communicates over Twitter.

"We're starting to see inventory draws in the U.S., the marginal barrels are clearing, but all of that can change if we have a tweet about the trade war," Croft said, adding that sentiment remained bearish amid an unresolved trade war.

All OPEC can do, she noted, was to assure markets that "they're going to be nimble, that they're going to be agile and that they're ready to respond. That's all they can do, is signal their determination and willingness to work together to see this (deal) through."

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