Presenting BofA’s “Number One Black Swan Event For The Global Oil Market In 2016”
We’ve spent quite a bit of time this year talking about Saudi Arabia’s rather precarious financial situation.
To be sure, the move to artificially suppress crude prices has at least partly served the kingdom’s interests in terms of market share and geopolitics. The US shale space has felt the screws tighten and even as wide open capital markets have helped even the weakest players stay in business, production is falling and for the most uneconomic producers, it does indeed appear that the music may finally be about to stop.
As for the “ancillary diplomatic benefits” (i.e. the geopolitical angle) of collapsing crude, the Russians have undoubtedly felt the squeeze and when considered in tandem with Western economic sanctions, one has to believe that the pain from low energy prices has been very real indeed for Moscow.
On balance though, it looks like this was a bad gamble for Riyadh. ZIRP has kept the US shale space in business far longer than the Saudis probably imagined would be possible and instead of forcing Putin to give up Assad, Russia instead built an air base at Latakia and plunged headlong into Syria’s civil war on behalf of the President.
Meanwhile, the fallout from “lower for longer” has been a disaster for the kingdom’s finances. Saudi Arabia’s budget deficit is expected to come in between 16% and 20% and for the first time in ages, the country faces a deficit on the current account as well.
The pressure is exacerbated by the necessity of preserving the societal status quo. Put Here’s what we mean (via Deutsche Bank):
The largest energy subsidy beneficiary is the end-consumer in the form of fuel (petrol) subsidies. Bringing up the price of petrol to levels in the UAE, which earlier this year eliminated the petrol subsidy, could provide the government with USD27bn incremental revenues, or 20% of the budget deficit.
…click on the above link to read the rest of the article…
