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Saudi Arabia Prepares $12-$20 Oil Price Scenario

Copyright © 2021 Energy Intelligence Group

Saudi Arabia is preparing budget scenarios that envisage benchmark Brent crude prices dropping into a $12-$20 per barrel range after launching an oil price war over the weekend that triggered a 24% slump in crude prices on Monday, sources familiar with the matter told Energy Intelligence. After failing to persuade Russia to agree to additional "Opec-plus" output cuts of 1.5 million barrels per day to offset the impact of the coronavirus epidemic on demand, the Saudis decided to raise oil production and offer deep discounts to their oil customers (IOD Oct.20'03). Energy Intelligence understands that Saudi Arabia is poised to increase production well above 10 million b/d in April, after the Mar. 31 expiry of the current Opec-plus production cuts. However, because oil makes up 65%-70% of Saudi budget revenues, lower prices as a result of higher global output would have a major impact on the kingdom's budget and drag it deep into deficit territory. Sources close to the Saudi ministries of economy and finance said reports are now being prepared for the kingdom's leadership that include an extreme scenario in which crude prices fall into a range of $12-$20/bbl. Another scenario being prepared envisages prices falling below $10/bbl, but this is seen as a very extreme case, the sources said. The sources said the kingdom is at huge risk of inflating its budget deficit, which would necessitate deep austerity measures. However, this would still not be enough to close the deficit. The plans envisage spending cuts across the board and would most likely impact all sectors, the sources added, declining to give more details. The move implies that the kingdom's leadership might be prepared to go to extreme lengths to force Russia to change its position and agree to the proposed cuts -- or drive high-cost producers in the US and elsewhere into financial difficulties and out of business. Critics of the decision to wage a price war against Russia say the kingdom risks "inducing a recession." So far, at least Moscow appears undaunted by the Saudi initiative. The Russian finance ministry said on Monday its reserves would allow the country to withstand prices of $25-$30/bbl for a period of 6-10 years. Saudi Arabia is the world's lowest-cost oil producer by far and technically it could continue to produce even if prices sank into single-digit territory. However, the country requires crude prices of at least $80 to balance its budget, according to the International Monetary Fund. The Saudi leadership was due to hold a meeting late on Monday to formulate a plan on oil and finance policy for the months ahead. So far, there has been no official comment on that front after the collapse of the Opec-plus talks in Vienna. The huge price discounts that Saudi Aramco offered to its crude customers around the world at the weekend sent oil markets tumbling, with Brent crude futures settling $10.91 lower at $34.36/bbl. Industry sources have told Energy Intelligence that Aramco is making preparations to boost oil production in phases to the company's maximum capacity of 12 million b/d, if required. According to Saudi economists, the country's budget deficit could reach around 500 billion riyals ($133 billion) if oil stays at $30/bbl, versus previous assumptions of a 187 billion riyal deficit, based on an oil price of around $55/bbl. "With every drop of $5 in oil prices, the budget deficit increases by 50 billion riyals," said Mazen al-Sudari, head of research at Al-Rajhi Capital in Riyadh. Last year, the budget deficit was 131 billion riyals and the expectation announced by the finance ministry in December was that the deficit would be around 187 billion riyals in 2020. At the time the ministry also said that projected spending for 2020 was 1,020 billion riyals, down slightly from the 2019 record of 1,048 billion riyals (IOD Dec.11'19). Staff reports

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