MK: Saudi oil statement reflects its economic woes
Saudi Arabia’s statement on Monday that it is ready to work with other energy producers to stabilise the oil price reflects growing concerns about the country’s economy.
The nation’s cabinet said it is ready to cooperate with both members and non-members of the Organization of the Petroleum Exporting Countries to achieve market stability, just days ahead of an OPEC meeting on December 4 to review its year-long policy of not supporting prices.
This could be an important change of heart by the Saudis as it hints that they might revert from their current policy of recovering market share to their old policy, dropped a year ago, of defending oil prices by cutting output.
In response, oil advanced modestly and it has gained a little more on Tuesday, with the front-month Brent crude futures contract up 0.9% at $45.22 per barrel by 1100 GMT.
The Saudi statement comes amid speculation that a devaluation of the riyal can no longer be ruled out as the nation faces both current account and budget deficits caused largely by the plunge in oil prices from above $115 over the past year and a half.
“Speculation over a devaluation of the Saudi riyal has mounted in the past few days but we think such a move is likely to be used as a last resort. Instead, we think cuts to capital spending are likely to bear the brunt of the adjustment to cheap oil over the coming years and, besides this, there are plenty of other options that the government would probably turn to before even considering devaluation,” writes Jason Tuvey, Middle East economist at Capital Economics.
He notes that although Saudi Arabia is currently running large twin deficits, its strong balance sheet means that it should be able to finance these shortfalls for many years to come. “Even so, some form of policy adjustment will be needed over the coming years and there is mounting speculation that Saudi Arabia will be forced to follow other large energy producers, such as Russia, Nigeria and Kazakhstan, by devaluing its currency,” Tuvey writes
Bank of America Merrill Lynch agrees such a move is unlikely. “True, Saudi has been forcing oil prices lower by increasing oil production in an oversupplied market, and it has also rushed to issue debt in its local market to fill a soaring budget gap,” write the bank’s commodity strategists.
“Can the government maintain this dual strategy of flooding the oil market and draining FX reserves? In our view, it is unlikely that Saudi leaders would want to exacerbate the ongoing reserve drain by pushing Brent prices below $40/bbl. After all, pressure will quickly build on the riyal’s 30-year peg to the USD if oil prices keep falling below the current levels. And frankly, it is a lot easier politically at first to deliver a modest crude oil supply cut than to implement a full-blown currency devaluation,” they add.
However, The Daily Shot newsletter points out that Saudi foreign exchange forwards are pricing in a weaker Saudi riyal in the next few months. “This smells of capital outflows and a potential devaluation vs. the dollar peg. While many point to the massive Saudi FX reserves as the reason the nation will not devalue, it’s important to point out that some countries with large FX reserves have in fact devalued their currencies,” the newsletter notes.
