Thursday, May 23, 2024

$100 Oil? That’s what Saudi Arabia needs to avoid deficit, per IMF

HomeBusiness$100 Oil? That's what Saudi Arabia needs to avoid deficit, per IMF

The International Monetary Fund has raised its estimate for the oil price Saudi Arabia needs to balance its budget this year to $96.20 per barrel, a significant 21% increase from its previous forecast in October. This upward revision comes as the OPEC leader spearheads major production cuts aimed at shoring up global crude prices.

In its regional economic outlook published Thursday, the IMF calculates that Riyadh will need an average Brent crude price of $96.20 in 2024 assuming it maintains an output level around 9.3 million barrels per day. This fiscal breakeven price is notably higher than current international benchmark Brent futures hovering near $89 per barrel.

The new $96.20 figure underscores how deeply Saudi Arabia has curtailed its oil production as part of the OPEC+ alliance’s coordinated supply cuts over the past year. Since July 2022, the kingdom has shouldered the lion’s share of reductions, slashing output by over 1 million barrels per day in a bid to prevent a global crude surplus and bolster prices.

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While these cuts have supported the oil market, they also mean Saudi Arabia must forgo substantial sale volumes. As the world’s lowest-cost producer, the kingdom can offset this lost output by earning more per barrel sold – hence the need for higher crude prices to fund its government expenditures.

“As Riyadh sacrifices sales volumes, it needs a higher price to compensate its budget,” said Garbis Iradian, the IMF’s Middle East director. “The kingdom requires greater oil revenues to plow ahead with Crown Prince Mohammed bin Salman’s ambitious reform agenda and transformation projects.”

Under the Crown Prince’s Vision 2030 plan, Saudi Arabia aims to diversify its oil-dependent economy while investing immense sums into sectors like tourism, renewable energy, and nascent technologies like artificial intelligence. Multi-billion dollar vanity projects like the $500 billion futuristic city Neom and acquisition of top global sports franchises have characterized MBS’s push to remake the Saudi brand.

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Funding this costly overhaul requires a steady gusher of petrodollars into state coffers. Even at $96 oil, the kingdom faces a fiscal deficit of around $16 billion this year based on spending projections. To bridge this gap, Riyadh raised $12 billion from its first dollar-denominated bond sale of 2024 in January.

The government’s goal of attracting $100 billion annually in foreign direct investment by 2030 – triple its current highest levels – also remains elusive so far. FDI inflows totaled just $24 billion in 2022 as investors balk at the kingdom’s restrictive laws and lack of transparency.

Other OPEC+ members like Kazakhstan and Iran also saw their fiscal breakeven oil prices rise for 2024 according to the IMF, though levels for Russia and most Gulf nations held steady or declined slightly.

However, Saudi Finance Minister Mohammed Al-Jadaan claims the kingdom does not require $96 oil to balance its books. He insists Riyadh bases its budget on a conservative $60-$65 crude price assumption, giving the government flexibility to maintain spending irrespective of market fluctuations.

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The OPEC+ coalition led by Saudi Arabia and Russia will next meet on June 1 to decide whether to extend their current 1.6 million barrel per day cut into the second half of 2024. With escalating Middle East conflicts providing a geopolitical risk premium for oil and global demand projected to rise, some analysts expect the group to start unwinding some of the cuts.

But as global economic headwinds gather pace, Saudi Arabia and its OPEC partners may well maintain a tight grip on supply to insulate budgets dependent on high oil prices and revenues. The kingdom certainly cannot afford a sustained crude price downturn after years of fiscal belt-tightening following the 2014-2016 oil market rout.

For MBS, funding his grand vision requires protecting a $96 barrel – even as betting the farm on fossil fuel windfalls appears increasingly unsustainable over the long-term.

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Mezhar Alee
Mezhar Alee
Mezhar Alee is a prolific author who provides commentary and analysis on business, finance, politics, sports, and current events on his website Opportuneist. With over a decade of experience in journalism and blogging, Mezhar aims to deliver well-researched insights and thought-provoking perspectives on important local and global issues in society.

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