RIYADH (AFP) -- King Abdullah's death could not have come at a worse time for Saudi Arabia's vital oil sector as the absolute monarchy seeks to reassert its leadership in a fast-changing industry.

After an exceptional decade that saw it build up production capacity and huge financial reserves, Saudi Arabia is facing a major challenge from new market players -- in particular North American shale oil producers.

The Gulf powerhouse now finds itself locked in a battle for market share against unconventional producers. It also faces challenges within the Organization of Petroleum Exporting Countries itself.

But experts expect Riyadh to fight fiercely to remain dominant.

"Saudi Arabia will compete very strongly to preserve its leadership in the oil markets," said Jean-Francois Seznec, a professor at Georgetown University and an expert on Gulf oil.

Since 2000, Riyadh has invested tens of billions of dollars to become the only nation with a viable spare production capacity of some three million barrels per day.

The kingdom -- which sits on the world's second largest oil reserves and its fifth largest natural gas deposits -- has also raised its refining capacity to around five million bpd and developed its natural gas sector.

Capitalising on turmoil in other OPEC states, especially Iran, Iraq, Libya and Nigeria, Saudi Arabia has raised daily output from just over eight million bpd in 2011 to 9.6 million bpd.

High oil prices and production have enabled Riyadh to build a firm fiscal cushion of more than $750 billion, but it remains heavily reliant on oil which provides 90 percent of public revenues.

Influenced by Riyadh and its Gulf partners, OPEC decided in November to keep output unchanged, sending oil prices into their steepest decline since the 2008 global financial crisis.

So far, crude prices have lost half their value.

Oil prices rebounded Friday following the death of King Abdullah as traders waited to see if his successor will maintain output in the face of a global supply glut.

US benchmark West Texas Intermediate for March delivery soared more than three percent in New York following the announcement but later pared gains.

The chief economist of the International Energy Agency, Fatih Birol, said that there would be no "significant changes" to the kingdom's oil policy.

"I expect and hope that they will continue to be a stabilisation factor in the oil markets," he told AFP on the sidelines of the World Economic Forum in Davos.

Saudi Arabia, which pumps a tenth of global oil supplies, has for the first time in four decades refused to act as market stabiliser, saying its decisions are purely economic and not political.

Oil Minister Ali al-Naimi -- in the post for 20 years -- has strongly defended Riyadh's actions as legitimate and vowed not to cut output even if prices plummet to $20 a barrel.

"If I reduce, what happens to my market share? The price will go up and the Russians, the Brazilians, US shale oil producers will take my share," he told the industry weekly Middle East Economic Survey in December.

Few people expect Riyadh's energy policy to change.

"I see a lot of continuity here," Frederic Wehrey, a senior associate at the Carnegie Endowment for International Peace's Middle East Programme, told AFP.

"The oil policy is set by a cadre of technocrats and I don't see the next monarch as significantly altering this."

However, Saudi policy, OPEC's stance and fundamental market changes all make the future highly unpredictable.

"Things could need one year, two years or three. We don't know what will happen in the future. What is certain, however, is that high-efficiency producers will rule the market in the future," Naimi said in December.

Between 2005 and last year, the United States reduced its net crude imports from 12.5 million bpd to around five million bpd, mainly because of soaring production from shale oil and gas.

It cut imports from the Middle East, Africa and Latin America, and bought more Canadian oil.

"No doubt the Saudi oil establishment feels somewhat threatened by the fact that the United States is producing over eight million bpd (on average) and limiting its net imports," Seznec told AFP.

US production "has created a shift in oil trade flows", Bassam Fattouh, director of the independent Oxford Institute for Energy Studies, told the Arab Energy Conference in Abu Dhabi in December.

After losing much US business, African and Latin American exporters are now looking eastward, Fattouh said.

With weak demand in China, now the world's top net crude importer, competition has become tough for Saudi Arabia which exports two-thirds of its oil to Asia.

Business is also threatened by potential output increases of some three million barrels per day if Libya, Iran and Iraq manage to restore or boost production.

Saudi economist Abdullah al-Kuwaiz said Riyadh had actively sought to diversify an economy in which the public sector still dominates.

But he said: "Riyadh still needs to do a lot to rationalise current expenditure, especially wages and salaries which account for 50 percent of spending."

Tycoon Prince Alwaleed bin Talal has also criticised Saudi reliance on oil income, advising prudent investment measures after Riyadh projected the largest deficit ever of $39 billion in the 2015 budget.