Saudi Arabia's newly named Crown Prince Mohammed bin Salman is unlikely to make changes to oil production policy but his more aggressive foreign policy stance could at some point put a political risk premium back in the price of oil, according to RBC's Helima Croft.
King Salman Wednesday named his 31-year-old son to be his successor, replacing his nephew Mohammed bin Nayef, who was stripped of all his posts.
Bin Salman has catapulted to power, taking a high-profile role in managing the kingdom and its program to transform the economy, while bin Nayef increasingly fell into a diminished role.
Bin Salman's visit to the U.S. earlier this year paved the way for President Donald Trump's trip to Saudi Arabia, portrayed by the kingdom as an endorsement of its leadership role in the region.
"The rise of MBS will also likely mean even more hawkish foreign policy moves from Saudi Arabia and more intensified efforts to confront Iran," wrote Croft, Global Head of Commodities Strategy at RBC.
She noted that the prince, known as MBS, launched what has turned out to be a costly war in Yemen and headed up the surprise blockade of Qatar.
"We contend the region could witness more near-term volatility and heightened risk of military confrontation. The political risk premium may therefore be set to stage a comeback," Croft wrote.
In a speech in Riyadh last month, Trump called on Muslim leaders to drive out terrorists, but he also had strong words for Iran.
He blamed Iranian leaders for training terrorists and spreading destruction and chaos across the region.
Trump, who is critical of the nuclear deal with Iran, called on all nations to work together to isolate Tehran until the regime is willing to be a partner for peace
"The key question is what comes next in this quest to counter Iranian influence? Is the Qatar blockade simply the opening act in a broader anti-Iranian offensive? Having President Trump in the White House probably means that MBS will encounter minimal push-back from Washington and a far freer hand to police his neighborhood," Croft wrote.
Al-Jazeera, in its coverage of the shakeup, said Bin Salman had previously said on Saudi TV that it is Iran's goal to "control the Islamic world" and spread Shia doctrine.
The Saudi royal family are Sunni Muslim, and according to the Jerusalem Post, bin Salman also commented that the struggle for influence between the Sunni Muslim kingdom and the revolutionary Shi'ite theocracy ought to take place inside Iran, not in Saudi Arabia.
Bin Salman was also reported as saying he would take "the battle" to Iran, which is on the opposite side in Yemen and Syria.
Iran on Wednesday called the promotion of the prince a soft coup.
Bin Salman is also spearheading Vision 2030, a plan to diversify the economy away from its dependence on oil, and there could be new momentum with the change in leadership, she noted.
A centre piece of the plan is the public offering of state-owned Saudi Aramco, expected next year.
"This is a big generational shift in Saudi Arabia. I used to talk about 70 being young for a Crown Prince in Saudi Arabia. To have 31-year old Crown Prince is a decisive break with past practice," Croft said on CNBC Wednesday. "To move aside Mohammed bin Nayef, the counter terrorism czar, the figure of the establishment, this is ground breaking for Saudi Arabia. The question is can Mohammed bin Salman deliver on his big reform plans?"
Oil prices were slightly higher Thrusday, after tumbling Tuesday on supply concerns.
The steep drop in crude has put oil back in a bear market, after it reached a high in the mid US $50s per barrel early in the year.
Saudi Arabia is a key driver of an OPEC deal with non OPEC producers, like Russia, to curb production in an effort to end a supply glut and drive prices higher.