Monday, 5 January 2015

What does the Saudi budget say about oil prices in 2015?

Despite the tough rhetoric, Saudi Arabia may need to cut its oil production to avoid making a sizeable budget hole even bigger

Oil market observers have been keenly waiting for the 2015 Saudi budget announcement. The price of oil assumed for the budget was supposed to indicate the likelihood of an OPEC production cut this year—a higher price assumption suggesting a higher probability of a cut. But when the budget was announced, there was considerable disagreement about the oil price assumption used by the Saudis. Some thought it was in the range of $55 to $63; others believed it was $75; still others reckoned it was close to $80.

The reason behind the disparity is that the Saudis do not explicitly publish the oil price projection on which they base their budget. In fact, they are very terse when it comes to publishing their sources of expected revenue and how much of it comes from oil versus non-oil sources. Therefore different analysts use different assumptions about non-oil revenue, total oil production and exports to back out the assumed oil price.

This has not only led to a wide range of estimates for the oil price used in the budget, but also to contradicting hypotheses about what the Saudis and OPEC are likely to do next. The total revenue figure published by Saudi Arabia is in fact consistent with two contradictory scenarios.

1. The status quo. In which the current production and export levels are projected to continue into 2015. This requires a price of around $60 per barrel to get the total revenue figure announced by the Saudi government. 

2. An OPEC cut. In which Saudi Arabia cuts its production and exports by around 1m barrels per day as part of coordinated cuts by OPEC members. This gives an oil price of around $72 per barrel.

While both scenarios are consistent with the $190.7bn total revenue number announced in the budget, the first one may not be feasible under current market conditions. If the Saudis continue to pump oil at the existing rate, then the market will probably be significantly oversupplied in 2015. This would result in a further fall in oil prices from their current levels (which are already below $60), and the $60 price used in the status quo scenario may not be achievable. This would lead to an even higher deficit than the $38.6bn the budget assumes. On the other hand, the OPEC cut scenario and its price assumption seem more in line with the 2015 expected demand and non-OPEC production growth.

So for all their tough rhetoric against production cuts, the Saudis may end up reducing their  oil production to avoid making a sizeable budget hole even bigger.


  1. Good point about the revenue figure being consistent with different oil price figures, I haven't seen that point made elsewhere. It's also important to note when trying to interpret GCC budgets that the budget are often not intended to be realistic, on either the revenue or expenditure sides, and so do not represent the governments' real expectations for oil prices. However, it may be that in 2015 that the budget expenditure will be applied much more rigidly in Saudi and elsewhere.

    1. For example of "not intended to be realistic, on either the revenue or expenditure sides", consider the budgeted (SR 855bn) vs. actual spending (SR 1,100 bn) for 2014 in Saudi Arabia.

    2. It is true that there has been a tendency for overspending in the recent past. But it is also true that with less oil revenue, spending plans may be implemented more rigorously.

  2. Very interesting article as always :) what are your thoughts on the possibility of government spending cuts? Do you note indications of these as this will have a bearing on what and when we can expect to see a move that will impact oil supply. Also, how willing and able are they to finance the deficit from their own surplus and maintain market share? In the end though, I do agree, OPEC cuts do seem inevitable.

    1. Thank you Karl. Most GCC governments have publicly stated that there will be no spending cuts on the horizon, especially investment spending. Some governments have the capacity to sustain spending using a combination of past savings and borrowing (the levels of public debt are quite low, which is helpful).

      On the OPEC cut issue, the consensus that seems to be emerging now is that there will not be a cut in 2015. I am less confident about this view than consensus, but we will see!