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Why China Will Continue To Buy Iranian Crude

Why China Will Continue To Buy Iranian Crude

While the United States sanctions…

Saudi Non-Oil Growth Caught In The Oil Price Bust Vicious Circle

Saudi wanks

While Saudi Arabia has started taking austerity measures to counter the falling revenues of its heavily-oil-dependent economy, the kingdom’s non-oil private sector growth slowed down in October to its lowest pace since record-keeping began in August 2009.

The non-oil sector’s Purchasing Managers’ Index (PMI) dropped for a second month in a row to a record low, and production and new orders increased at their smallest rates since record-keeping started.

Feeling the now serious sting of the low price of oil—its main cash cow—Saudi Arabia has started to introduce cost-cutting measures such as cutting perks and allowances for the public sector, which employs around two-thirds of working Saudis. Aside from being largely unpopular, it’s likely to further reduce the purchasing power of households, resulting in even more economic slowdown.

The oil-rich kingdom is also seeking to diversify revenues away from oil, but that’s not a quick solution, and until this transition happens, Saudi Arabia’s economic growth, oil or non-oil, is tightly tethered to crude oil prices.

Saudi Arabia, OPEC’s de facto leader, now needs oil prices greater than just stable. They need prices to be higher than current levels, and as such, Saudi Arabia is expected to cut something off the record oil output it had reached in the summer.

Still, after the peak summer demand season ended, the Saudis could simply scale back to a level that is seasonally appropriate—a level they plan on anyway—and wrap it up with a bow and gift it as a ‘sacrifice’ for fellow OPEC members—and for the markets, who would probably temporarily respond favorably to a small cut, even if it mirrors regular seasonal cuts.

Related: Oil Continues To Crash After EIA Reports Biggest Inventory Build In 34 Years

Unfortunately, with the growing camp of the members who are pleading exemption in OPEC’s production cuts - the latest being Iraq – Saudi Arabia may need to deepen cuts if it wants to convince the cartel it is ready to take one for the team.

According to Bloomberg estimates, in the worst-case scenario, the Saudis might need to cut 1 million bpd, which is not very likely.

Last week the market was caught by surprise by reports that Saudi Arabia and its Gulf OPEC producer allies had signaled that they would be ready to cut their near record crude oil production by 4 percent.

The Saudis will likely do some cutting, but it’s unlikely they will lower their oil output to two-year-lows.

By Tsvetana Paraskova for Oilprice.com

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