Saudi fiscal health may mean less resistance oil weakness

Top oil exporter Saudi Arabia is less resistant to falling prices than it was at the start of this year, because of its deteriorating fiscal health, but this will not necessarily mean it will cut output, consultant Energy Aspects said on Monday.

The price of oil has roughly halved to close to $50 a barrel in the last year and the kingdom’s revenues from its crude sales make up 90 per cent of its budget.

Rising spending and falling oil revenues have created a state budget deficit which the International Monetary Fund projects at 20 per cent of GDP this year, equivalent to roughly $150bn.

Energy Aspects estimates that the government’s spending programme, particularly on military expenditure, have cut the value of Saudi Arabia’s net foreign reserves by $52bn in the first five months of 2015.

“We’re not saying it means the policy around high production and leaving the market to rebalance is going to change just yet, but the patience and resilience within Riyadh may be shorter than it was looking to be at the beginning of the year,” Energy Aspects geopolitical analyst Richard Mallinson said.

Saudi Arabia, like most oil-producing Gulf states, cannot gain a competitive advantage from the 8-per cent rise in the value of the dollar this year, as it pegs the riyal to the U.S. currency, which prevents it from devaluing.

The benchmark Brent crude futures price has fallen by nearly 10 per cent in 2015, pushed lower by the Organization of the Petroleum Exporting Countries, including Saudi Arabia, pumping more oil to retain market share, but also by non-OPEC producers, such as the U.S. shale oil industry.

Demand from consumers such as China, Brazil and Russia has slowed this year, thereby worsening the balance between supply and demand.

OPEC meets in early December, but at this point, is not expected to deliver a cut.

“OPEC production has jumped a lot this year on Saudi Arabia and Iraq. But there are very good reasons to think neither is going to continue pushing higher and, actually in the case of Saudi Arabia, they could well decide to ramp back down, both seasonally once we come out of summer, but also if they see non-OPEC producers responding,” Energy Aspects’ Mallinson said.

“The financial situation creates an incentive for them, once they feel that price recovery has started, to dial back their own production to help add momentum.”