Things are starting to look good financially for Saudi Arabia again - very good. The de facto OPEC leader and world’s largest oil exporter said today it posted a budget surplus of 27.8 billion riyals (U.S. $7.4 billion) in the first quarter of the year. The Kingdom actually posted a budget deficit of 34.3 billion riyals in the first quarter of last year as the Saudi economy emerged from a recession in 2017, the first time the economy had shrunk since the global financial crisis nearly a decade earlier.
According to its 2019 budget, Saudi Arabia plans to increase state spending by 7 percent this year in an effort to spur economic growth that was hurt by low oil prices late last year. Saudi finance minister Mohammed al-Jadaan told a conference in Riyadh on Wednesday that expenditure in the first quarter amounted to 217.6 billion, slightly higher when compared to last year.
Not only has Saudi Arabia pivoted from a budget deficit, but the goal of some of the Kingdom’s energy players of having oil prices near $80 or even more per barrel is also now in sight. Global oil prices so far this year have already hit multi-month highs amid the OPEC+ oil production cut put in place at the start of the year to remove 1.2 million barrels per day (bpd) of oil from global markets, as well as output losses coming from Iran and Venezuela from U.S. sanctions, and also loss of output in Libya which is embroiled in fighting around Tripoli. Moreover, now that President Trump has decided to not renew waivers for Iranian oil imports, prices have plenty of upside potential left.
Fiscal break-even point
Several industry sources recently indicated that Saudi Arabia needs oil north of $70 per barrel to help shore up its coffers. Officially, of course, Riyadh doesn’t comment on what oil price they would like to see. The Kingdom maintains the same well-worn line that price levels are determined by the market and that it’s merely targeting a balance of global supply and demand. However, the International Monetary Fund (IMF) said in February that even $70 oil is not enough to balance Saudi Arabia’s books over the long haul and that Riyadh needs oil between $80 to $85 per barrel - the so-called fiscal break-even point.
Major turn around
Saudi Arabia’s budget surplus for the quarter, nonetheless, is a major turn around from just a few years ago when it appeared that the Kingdom was coming apart financially. In its now obviously ill-planned decision in late 2014 to abandon its role as global oil markets swing producer and actually ramp up production as oil supplies were increasing and prices were tanking, Saudi Arabia hurt itself as much or more than U.S. shale oil producers it wanted to drive out of the market - though Riyadh vehemently denied it was trying to drive U.S. producers out of the market. The officials' line was that it was protecting market share, particularly in Asia where competition from other OPEC producers and Russia is fierce. Related: Saudi Oil Minister: We Won’t Ramp Up Oil Production Soon
However, that late 2014 decision almost bankrupt the world’s wealthiest oil-producing nation. Oil prices plunged from above $100 per barrel in mid-2014 to dipping below the $30 price point in January 2016. Due to low oil prices, attributed to the supply glut, the Kingdom – which derives as much as 90 percent of its revenue from oil sales – ran a historic budget deficit in 2015 of $98 billion, with around $87 billion in 2016. As a result, Riyadh Kingdom was forced to raise cash, some $16. 5 billion, in its first international bond sale.
With oil prices still trending upward and with the OPEC+ group of producers, including non-OPEC oil kingpin Russia, still in agreement, any repeat of the 2014-2016 crash in global oil markets seems unlikely in the foreseeable future. The question now, at least in the short term, is: Will Saudi Arabia ramp up production to offset the loss of Iranian barrels due to Trump’s refusal to renew Iranian oil sanction waivers? And, if it does ramp up production, when and by how much? It’s likely that the Kingdom will let prices continue their northward trajectory - even if Trump calls for more production via Twitter - before they actually take decisive action. For the Saudis, oil at $85 a barrel or more would be a delightful development - especially for its budgetary needs.
By Tim Daiss for Oilprice.com
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And despite his continuous tweets, President Trump can’t force oil prices down. What is causing oil prices to surge is a convergence of bullish influences currently at play such as a strong global oil demand adding 1.45 million barrels a day (mbd) this year over 2018, rock solid Chinese oil imports projected to hit 11 mbd this year, a Chinese economy growing at 6.4% this year beyond the projected 6.3%, a confirmed slowdown in US production and a tightening global oil market caused by OPEC+ production cuts.
If these bullish influences stay with us this year, then Saudi Arabia’s dream of a $85 a barrel will become a reality.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London