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Saudi Cash Reserves and the Price of Oil

Saudi Arabia has been willing to drawn down on its cash reserves in what is essentially an oil war. Forbes notes that the oil producer will need $70 a barrel oil to staunch its loss of funds.

In October of 2014, Saudi Arabia signaled that it was willing to let oil prices fall and no longer cut production to support higher prices. Since that time Saudi Arabia has spent nearly $50 billion of its foreign reserves to keep its domestic social contract going in the face of diminishing oil revenues.

The oil kingdom has put its money where its mouth is in an effort to protect market share and get both OPEC and non-OPEC members to limit oil production. So what has Saudi Arabia’s $50 billion bought? Saudi Arabia’s policy together with a flood of oil supply and slow global economic growth drove down the price of Brent crude oil from $115 a barrel in June 2014 to as low as about $45 a barrel in January. But the price of oil came roaring back in April, staging its biggest monthly gain in six years, and is now trading above $66 a barrel.

The low price of oil is hurting US producers more than the Saudis because Saudi Arabia spends a lot less to produce a barrel of oil than fracking operations in the Bakken formation of North Dakota. Oil producers such as Russia and Venezuela are begging for a production cut in order to drive prices back up. But decreased global demand coupled with the Saudis wanting to maintain their customer base make this unlikely. The wild card in this situation may be Saudi cash reserves and how far they are willing to spend down.

Saudi Arabia has some $708 billion of foreign oil reserves left to wage its oil war. The country’s new king, Salman bin Adbulaziz Al Saud, is dealing with a budget deficit of at least $40 billion this year – The Financial Times said it could reach $100 billion. Sub-$70 oil does not appear to be sustainable for Saudi Arabia, but for now it seems willing to keep spending its cash in an attempt to assert its will on global oil markets.

Iraq Production Recovers

As bad as things are in Iraq with the ISIS, Iraqi exports are up. Reuters reports that Iraq exports have hit a record high. This is another country that can produce a barrel of crude for substantially less than drillers in the USA.

Oil prices eased off 2015 highs on Friday after Iraq said its crude oil exports hit a record in April, and as the dollar strengthened.

Brent and U.S. crude rallied between 20 and 25 percent in April, helped by a weaker dollar and bets that a global supply glut would ease, following the June-to-January sell-off that halved prices from above $100 a barrel.

Friday’s pullback was sparked first by news that Iraq’s oil exports rose in April to a record 3.08 million barrels per day (bpd) from 2.98 million bpd in March, which served as a reminder of ample supply in the market.

OPEC supply in April rose to its highest in more than two years at 31.04 million bpd, according to a Reuters survey.

Saudi cash reserves may continue to fall if they insist on maintaining production quotas while more cheap oil from the likes of Iraq and Iran come on the market.

Lower Prices

The price of oil was inching up in April until Iraqi production peaked and global demand failed to strengthen. The Wall Street Journal notes how oil slips in price.

Oil prices retreated from 2015 highs Friday as traders assessed the recent strong rally and the still-oversupplied global crude market.

Light, sweet crude for June delivery recently traded down 78 cents, or 1.3%, to $58.85 a barrel on the New York Mercantile Exchange. Prices had soared 25% in April, settling Thursday at the highest price since Dec. 11.

Brent crude, the global benchmark, recently fell 64 cents, or 1%, to $66.14 a barrel on ICE Futures Europe. The contract had gained 21% in April.

Saudi cash reserves are likely to continue to fall if they insist on maintaining production to produce a global glut and in an effort to maintain their market share in light of weakening demand.

Saudi Cash Reserves and the Price of Oil PPT





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