Saudi Arabia's success in leading both OPEC and non-OPEC production partners in reigning in record high OECD oil inventories amid the group's ongoing oil output cut is starting to pay off for Riyadh.
In a report late last week BMI Research said that the Saudi economy is poised to grow by 1.6 percent this year amid a rebound in oil prices and an easing of fiscal austerity.
"The Saudi economy will recover in 2018, as continued gains in oil prices support the government's move towards a more expansionary fiscal policy in turn boosting consumption in the Kingdom," BMI said in its report.
However, the introduction of a new 10 percent VAT on private sector activity will be a drag on the country's private sector for the first half of the year, the report added.
Yet, despite its efforts at pivoting the economy away from overreliance on oil revenue, the Kingdom remains an oil-based economy. Shipments of oil account for 87 percent of total exports and around 46 percent of GDP.
Propped up by oil price hikes
Global oil prices have trended upward this year from dipping below the $30 per barrel price point in early 2016 to now hovering in the mid-$70s range for global benchmark, London-traded Brent crude, with the likelihood that prices will breach the $80s mark in a few weeks if President Trump levels fresh sanctions against Iran, OPEC's third largest producer. New sanctions could remove up to 800,000 barrels per day (bpd) of Iranian crude from global oil markets, further tightening global oil supplies as demand and consumption increase, resulting in even higher prices.
Saudi Arabia indicated late last week that it would even be content with oil prices reaching up to $100 per barrel, though at that price, since oil is a fungible commodity demand destruction would likely set in as both consumers and industry would seek alternative fuel sources to replace higher priced oil. If demand destruction enters, an ensuing slump would develop - something the Saudis should be cognizant of and a market dynamic seen in 2007/08 and again in 2013/2014.
Standard Chartered last week revised its oil price forecast for 2018 up by $10, stating that the market has begun to acknowledge the importance of OPEC-led production cuts. It's the first time in almost a year the bank revised its oil price forecast. For 2019, the bank raised its forecast by $13, with Bent prices at $75 per barrel and NYMEX-trade West Texas Intermediate (WTI) at $72 per barrel. Related: The Next Big Threat For Chinese Oil Demand
"OPEC and its non-OPEC partners are now receiving greater acknowledgment for market discipline, views of shale oil economics are no longer the most important price-setting factor, and demand pessimism is significantly reduced," the bank said.
The BMI report and Standard's updated forecast are both good news for Saudi Arabia who started running record high budget deficits in 2015 as oil prices plunged from over $100 per barrel in mid-2014 to multi-year low's that forced Riyadh to enact unpopular austerity measures, as well as issue bonds on international markets.
Saudi Arabia issued its first international bond sale in 2016, the largest for a developing economy, raising some $17.5 billion, to help offset the impact of low oil prices on state coffer. Last week, the Kingdom also issued an $11 billion international bond issue to cover its hard currency funding needs for the year, its fourth international bond, in tranches of seven, 12 and 31 years, attracting massive investor orders of $52 billion, according to a Reuters report.
OPEC/non-OPEC producers are slated to meet in Vienna on June 23, a day after an OPEC only meeting. A technical committee monitoring a deal to cut oil output between the OPEC and non-OPEC producers led by Russia will meet on June 19.
By Tim Daiss for Oilprice.com
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I'm an oil markets analyst, journalist and author that has been working out of the Asia-Pacific region for 12 years. I’ve covered oil, energy markets… More
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