Page 7 - MEOG Week 12

MEOG Commentary MEOG
oil price plunge
Riyadh earlier this month set off an oil price war, slashing its prices to buyers and raising its oil production from a recent 9.7mn barrels per day to 12.3mn bpd in a strategy to increase its market share.
This, coupled with fall in demand from the coronavirus, could plunge crude prices into the teens, analysts say. International benchmark Brent crude was trading at $25.80 a barrel on Monday.
According to various analysts and the Inter- national Monetary Fund (IMF), Saudi Arabia needs oil priced at around $82 to $90 per barrel to balance its budget and a government state- ment on Friday quoted al-Jadaan as emphasis- ing that “the government has considerable ability to diversify sources of financing between public debt and government reserves to adequately tackle the emerging challenges.”
Even before falling out with Russia this month over how to manage oil prices, the gov- ernment embarked on three years of spending decreases by earmarking less money for subsi- dies, social benefits and the military.
It was targeting a fiscal deficit of 6.4% of GDP this year under the assumption that Brent would average about $65 per barrel, well below its breakeven budget price.
But the disintegration of the production pact between OPEC and Russia jolted the oil mar- ket and threatened to stretch the finances of the world’s biggest crude exporter. Benchmark Brent was sitting at $26 on Monday after settling at its lowest since May 2003.
Saudi Arabia would run a budget deficit of
23% of GDP if Brent falls to $20, while its cur- rent account shortfall would reach 15.6% of eco- nomic output, or $122bn, JPMorgan Chase & Co. analysts estimate.”
Such a situation would imply a very fast rate of depletion” of Saudi foreign currency reserves, JPMorgan analysts including Nicolaie Alexand- ru-Chidesciuc said in a report.
“It would also be associated with a rapid increase in debt/GDP and would thus create serious financial stability issues. Consequently, the kingdom may not sustain the price war for very long.”
The kingdom was among the last in the Gulf to report cases of the virus, with a total of 238 identified so far.
Authorities responded by suspending travel from neighbouring countries suffering from the outbreak, stopped issuing tourist visas and shut down schools.
Saudi Arabia even took the unprecedented step of temporarily halting the Umrah religious pilgrimage for its citizens and residents. It also temporarily ordered all but essential workers to stay at home.
The kingdom is consulting with other Group of 20 countries about a potential summit next week in an attempt to unify efforts to slow the pandemic. Saudi Arabia is the G-20’s host nation this year.
For Saudi Arabia, whose sovereign wealth fund is under pressure and which has an ambi- tious Vision 2030 economic plan, such a meet- ing might be a first step to bringing matters back from the brink and avoiding a major hit to its economy and social infrastructure.™
Week 12 25•March•2020 w w w . N E W S B A S E . c o m P7