Tags: Saudi Arabia | oil | OPEC | crude

Saudi Arabia Spending Means Less Room for OPEC to Cut Output

Thursday, 18 December 2014 06:39 AM

Saudi Arabia’s plan to continue spending on social projects and security increases the likelihood that the world’s biggest oil exporter will stick with OPEC’s policy of maintaining output even as crude prices plunge.

“Saudi Arabia is backing up OPEC policy with action to strengthen the home front against the adverse impact of falling oil prices,” Arabia Monitor Chief Economist Florence Eid- Oakden, whose firm advises investors on business risks in the Middle East, said Wednesday.

The Saudi stock market rebounded after Finance Minister Ibrahim al-Assaf announced that the government plans to fund “massive” development projects next year, focusing on health care, education, social services and security. The Tadawul stock index lost almost a third of its value since September amid expectations that falling oil prices will curtail government spending.

The Organization of Petroleum Exporting Countries decided Nov. 27 to keep its output unchanged, in spite of a global supply glut fed partly by production of shale oil in North America. Saudi Arabia led a group of Arab monarchies in opposing calls by Venezuela and other OPEC members, whose economies are threatened by the fall in oil prices, to cut output. OPEC supplies about 40 percent of the world’s oil.

“We do believe the Saudis when they say they are prepared for an extended period of low prices, long enough in duration to achieve their goal of slowing and possibly reversing U.S. production growth,” Michael Wittner at Societe Generale SA said yesterday in an e-mailed report.

‘Under Stress’

Brent crude, a pricing benchmark for more than half of the world’s oil, has dropped 45 percent this year and slid below $60 a barrel this week for the first time since 2009. The oil added 17 cents to $61.35 a barrel on the London-based ICE Futures Europe exchange at 12:53 p.m. Singapore time.

OPEC members Angola, Algeria and Iran are “under stress,” OPEC President and Nigerian Petroleum Minister Diezani Alison- Madueke said Dec. 4. Venezuela’s bonds dropped to a record low on Dec. 16, fueling speculation that the nation may default. Nigeria’s currency, the naira, fell yesterday to the lowest against the dollar since Bloomberg began compiling data in 1999.

“The Saudis are staying the course because they have the financial reserves to help support their budget,” Theodore Karasik, a senior adviser with Risk Insurance Management in Dubai, said by phone. “They are also betting the oil price will rebound at the end of the second quarter of 2015, based on slowing investment in new production.”

Public Revenue

While Saudi Arabia hasn’t yet published its budget for 2015, King Abdullah’s government announced about $500 billion in projects over the past few years to build roads, airports and industrial centers as he seeks to reduce the country’s dependence on oil revenue and trim its 12 percent unemployment rate.

Saudi Arabia has maintained a counter-cyclical economic policy by increasing financial reserves and cutting public debt during periods of “high public revenue,” the state-run Saudi Press Agency cited al-Assaf, the finance minister, as saying.

This policy has provided the kingdom with “lines of defense” in times of need, including the financial crisis of 2008, al-Assaf said. “This policy will continue in the next budget.”

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Saudi Arabia's plan to continue spending on social projects and security increases the likelihood that the world's biggest oil exporter will stick with OPEC's policy of maintaining output even as crude prices plunge.
Saudi Arabia, oil, OPEC, crude
Thursday, 18 December 2014 06:39 AM
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