Saudi Arabia’s plan to cut oil production by around 10% could seriously affect its finances.
Sunday’s decision, which will see the kingdom cut crude output to 9 million barrels a day next month and perhaps beyond, has failed to boost prices much. Oil futures have risen less than 1 percent since Energy Minister Prince Abdulaziz bin Salman announced the unilateral cut after an OPEC+ meeting.
The prince, speaking in Vienna, described him as a “lollipop” to other members of the producers’ cartel.
The kingdom’s fiscal outlook was worsening even before this weekend. The budget was in deficit for the last two quarters as oil fell, while spending on salaries and massive tourism and infrastructure projects soared.
The International Monetary Fund estimates that Riyadh will need an oil price of almost $81 a barrel to balance its books this year, which is above Brent’s current level of about $77.
The situation is tougher when you consider Crown Prince Mohammed bin Salman’s mega-projects like the new city of Neom. The IMF excludes them mainly because they are largely financed by the sovereign wealth fund and other state entities, rather than directly from the government budget.
If they are included, the price of Saudi Arabia’s oil rises to $95 a barrel, according to Bloomberg Economics.
The Saudi government is more optimistic and expects to post an annual fiscal surplus of $4.3 billion this year.
The kingdom was the fastest-growing economy in the Group of 20 last year as Russia’s invasion of Ukraine rattled energy markets and pushed oil above $125 a barrel. It also pumped an average of 10.5 million barrels a day, an annual record.
The latest output cut means the economy will likely grow 0.7 percent in 2023 instead of 1 percent, according to Monica Malik, chief economist at Abu Dhabi Commercial Bank PJSC.
“It will also increase the oil price of Saudi Arabia’s budget balance if all other things remain the same,” Malik said.
Many energy analysts, as well as the Organization of the Petroleum Exporting Countries, expect the oil market to tighten in the second half of the year as demand in China and India rises further. This could boost prices, offsetting the financial impact on Saudi Arabia of its lost production.
But many traders are bearish, saying high interest rates and economic weakness in the US and Europe will weigh on oil prices for at least the rest of the year.
Riyadh’s move to cut output is “unlikely to sustain a sustainable rise in prices,” said analysts at Citigroup Inc., including Ed Morse. “Demand looks weaker and non-OPEC supply stronger later this year than many analysts had expected.”
If oil doesn’t jump, “we expect the additional production cuts to be longer and the impact on the fiscal balance will be more negative” for Saudi Arabia, said Amy McAlister, chief economist for Europe, the Middle East and Oxford Economics Africa. .
–With the help of Paul Abelsky.
