Budget strain not behind higher Saudi oil price view

  • Share via facebook
  • Tweet this
  • Bookmark and Share
HIGH PRICE: Saudi believes ideal range of producers and consumers was $70 to $90 a barrel (Getty Images)

HIGH PRICE: Saudi believes ideal range of producers and consumers was $70 to $90 a barrel (Getty Images)

Saudi Arabia's shift to a higher oil price comfort range reflects a desire to make up for a weaker dollar rather than strain on the kingdom's budget and government spending is seen staying strong in the coming year.

The world's top crude exporter moved its preferred price up a notch this week, saying $70-$90 a barrel was an acceptable range for consumers, driving oil prices higher.

Andrew Gilmour, senior economist at Samba Financial Group in London said: "I do not think it has a budget connection. The dollar's weakness is the most significant factor."

Until this week, Saudi Oil Minister Ali al Naimi had said the ideal range for producers and consumers was $70-$80 a barrel, the line held for the past two years.

His comments on Monday helped drive benchmark US crude to a session high of $83.86 a barrel. The price firmed further and touched a six month high above $85 on Wednesday.

The US currency has weakened in anticipation the Federal Reserve would opt for a new round of quantitative easing.

Reinhard Cluse, EMEA economist at UBS in London said: "They see that double-dip concerns are no longer at the forefront of people's thinking and prospects for quantitative easing two mean a weaker dollar globally."

He said: "Thinking that they would like to fix their budget by manipulating the oil price is too far fetched. They have the influential position but they are not a price maker."

The Saudi finance ministry declined to comment.

As oil is priced in dollars, a weakening of the currency reduces revenues for non-US producers and also contributes to a perception that oil prices have scope to rise.

Key OPEC member Saudi Arabia ramped up spending to help its crude reliant economy sail through the global crisis, launching a $400 billion 5 year plan in 2008, the largest stimulus relative to gross domestic product among 20 leading nations.

This jump in spending raised the budget break even oil price by nearly $40 between 2006 and 2010, Banque Saudi Fransi estimates, with $70 a barrel seen as a comfort level.

Leo Drollas, deputy executive director and chief economist at the Centre for Global Energy Studies said: "The absolute minimum OPEC oil price basket that Saudi Arabia needs is around $60 per barrel. Below that level they are very unhappy and even at $60, they are not covering a number of costs, debt interest, capital expenditure and contingencies."

He said: "Altogether, Saudi needs around $74 per barrel and this year the price is likely to average around $75."

Last month, Finance Minister Ibrahim Alassaf said the top Arab economy expects to spend more than initially budgeted for 2010.

Khan Zahid, chief economist at Riyad Capital said: "I do not believe that Saudi Arabia needs higher oil prices. However, the falling dollar is becoming a concern."

The dollar, which is moving near its softest levels against the euro since the end of January, is expected to stay weak as the course of US and European monetary policies diverges.

A surge in oil receipts has encouraged the OPEC member to exceed budgeted spending on a regular basis. The kingdom overspent its plan by 26 percent last year, posting a deficit of 6.2 percent of GDP, nearly double its original plan.

Riyadh drafted its 2010 budget with a 70 billion riyal gap $18.7 billion and spending of $143.9 billion with an expansionary mode seen continuing next year.

John Sfakianakis, chief economist at Banque Saudi Fransi said: "The higher spending does not seem to be moderating and 2011 will be characterized by another expansionary budget."

Despite its wealth Saudi Arabia is facing rising unemployment of its citizens and is spending on building universities and industrial projects to create jobs. (Reuters)

 

Related:
Join the Discussion

Disclaimer:The view expressed here by our readers are not necessarily shared by Arabian Business, its employees, sponsors or its advertisers.

Please post responsibly. Commenter Rules

  • No comments yet, be the first!

Enter the words above: Enter the numbers you hear:

All comments are subject to approval before appearing

Further reading

Features & Analysis
Saudi Arabia adds to oil power with new refineries

Saudi Arabia adds to oil power with new refineries

Two state-of-the-art plants set to redefine Gulf kingdom's role...

Focus: How low can the oil price fall?

Focus: How low can the oil price fall?

The startling fall in the oil price has renewed questions about...

Saudi Arabia, Kuwait shared zone tensions underlie oilfield closure

Saudi Arabia, Kuwait shared zone tensions underlie oilfield closure

Crude output from jointly-run offshore Khafji oilfield has been...

Most Popular
Most Discussed