Saudi Economic Moves Indicate Oil Prices Will Stay Low Into 2016
By Burt Carey
Saudi Arabia’s budget moves this week signaled the kingdom’s willingness to allow low oil prices to remain in place into 2016.
In a news conference Monday, Saudi Aramco Chairman Khalid al-Falih indicated that the Saudi Arabian government’s choice is to allow surplus oil to remain in the market, keeping the cost of crude at levels not seen in more than a decade. The kingdom will cut domestic spending and energy subsidies to maintain its share of the world oil market. Aramco is the world’s largest state-run oil company.
“We see the market balancing sometime in 2016,” Falih said. “We see demand ultimately exceeding supply and soaking up a lot of the excess inventory, and prices in due course will respond regardless of when and by how much.”
“We don’t see any changes to Saudi Arabia’s oil policy in the context of oil production,” said Energy Aspects analyst Amrita Sen. “The budget changes suggest they are expecting oil prices to stay low for some time and the reforms are a small step toward addressing that.”
In response, the Saudi budget for 2016 calls for spending just 840 billion riyals (about 224 billion US dollars). It spent 975 billion riyals in 2015, the equivalent of about $260 billion in US currency. Domestically, Saudi Arabia’s budget deficit in 2015 was about 367 billion riyals. Government officials aim to cut that deficit to 326 billion riyals in 2016.
Saudi Arabia pushed the Organization of the Petroleum Exporting Countries (OPEC) to flood the world’s oil market with excess crude in 2015 and was behind the organization’s decision in early December to continue the trend. Crude oil is currently trading at its lowest prices since 2004.
“Over the last year we have seen the down cycle in the oil markets have a significant impact on both supply and demand,” Falih said. “Supply has plateaued in North America and started declining by significant amounts and we expect that to continue or perhaps accelerate in 2016. Saudi Arabia more than anyone else has the capacity to wait out the market until this balancing takes place.”
The price of Brent crude, which traded at $115 per barrel in June 2014, was about $36.85 a barrel Tuesday.
Image: Dana Robinson