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.
