Cash-Strapped Saudi Arabia Hopes To Continue War Against Shale With Fed's Blessing

Tyler Durden's picture

Two weeks ago, Morgan Stanley made a decisively bearish call on oil, noting that if the forward curve was any indication, the recovery in prices will be "far worse than 1986" meaning "there would be little in analysable history that could be a guide to [the] cycle."

As we said at the time, "those who contend that the downturn simply cannot last much longer are perhaps ignoring the underlying narrative that helps to explain why the situation looks like it does."

"At heart," we continued, "this is a struggle between the Fed’s ZIRP and the Saudis, who appear set to outlast the easy money that’s kept US producers alive." This is an allusion to the fact that the weakest players in the US shale industry - which the Saudis figure they can effectively wipe out - have been able to hold on thus far thanks largely to accommodative capital markets.

But persistently low crude prices - which, if you believe Morgan Stanley, are at this point driven pretty much entirely by OPEC supply - are taking their toll on producers the world over. That is, the damage isn’t confined to US producers.

In fact, the protracted downturn in prices is slowly killing the petrodollar and exporters sucked liquidity from global markets for the first time in 18 years in 2014. To let Goldman tell it, a "new (lower) oil price equilibrium will reduce the supply of petrodollars by up to US$24 bn per month in the coming years, corresponding to around US$860 bn" by 2018.

As Bloomberg noted a few months back, the turmoil in commodities has produced a "concomitant drop in FX reserves ... in nations from oil producer Oman to copper-rich Chile and cotton-growing Burkina Faso."

And don’t forget Saudi Arabia which, as you can see from the chart below, isn’t immune to the ill-effects of its own policies.

The financial strain comes at an inopportune time for the Saudis and indeed, as we noted when the country moved to open its stock market to foreign investment in June, "the move to allow direct foreign ownership of domestic equities [may reflect the fact that] falling crude prices and military action in Yemen have weighed on Saudi Arabia’s fiscal position."

"Our forecast is for Brent to average US$54 per barrel in 2015 [and] at this price, we expect total Saudi government revenues to fall by some 41% in 2015.[resulting] in [sharp] cuts to expenditures," Citi said at the time.

Now that Saudi boots are officially on the ground in Yemen (if only to provide "training") and now that it appears the Kingdom is prepared to step up its military efforts in Syria, the financial strain from lower crude prices looks set to drive the Saudis into the bond market. Here’s FT with more:

Saudi Arabia is returning to the bond market with a plan to raise $27bn by the end of the year, in the starkest sign yet of the strain lower oil prices are putting on the finances of the world’s largest oil exporter.


Bankers say the kingdom’s central bank has been sounding out demand for an issuance of about SR20bn ($5.3bn) a month in bonds — in tranches of five, seven and 10 years — for the rest of the year.


The latest plans represent a major expansion of that programme, which bankers believe could even extend into 2016, given the outlook for the oil price.


Saudi Arabia’s resort to further domestic borrowing highlights the challenges facing the region’s largest economy amid one of the steepest falls in the oil price in recent decades. Brent, the international benchmark, has dropped from $115 a barrel in June last year to about $50 this week.


Oil’s decline accelerated in November when Opec, the producers’ cartel, decided not to cut output, a major departure from its traditional policy of trimming production to prop up prices. Saudi Arabia said it was an attempt to defend market share against rivals such as the US shale industry.


But the decision to ride out a sustained period of lower prices has put a huge strain on the finances of major oil exporters, including Saudi Arabia which requires an oil price of $105 a barrel to balance its budget.


The kingdom has drained $65bn of its fiscal reserves to maintain government spending since the oil price plunge began. Sama currently has $672bn in foreign reserves, down from their peak of $737bn in August 2014.


The plan to resort to capital markets, if confirmed, demonstrates the priority Riyadh is placing on maintaining government spending, despite the pressure cheap oil is putting on its budget.


The monthly bond issuance plan would only cover part of the deficit, which economists estimate will reach SR400bn this year amid falling revenues and continuing high expenditure on big infrastructure projects, public sector wages and the continuing war in Yemen.

In case the irony here isn't clear, allow us to explain.

Saudi Arabia has effectively kept oil prices suppressed in an effort to wipe out the US shale industry which has only managed to stay afloat this long because Fed policies have kept monetary conditions loose and driven investors into HY credit and other risk assets. Now, Saudi Arabia is set to take advantage of the very same forgiving capital markets that have served to keep its US competition in business as persistently low oil prices and two armed conflicts look set to strain the Kingdom's finances. 

Of course one option for keeping the cash drain to a minimum would be to avoid getting involved in multiple regional proxy wars - but where's the fun in that? 

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Glass Seagull's picture



Issue a boat load of sukuks


pay little/nothing to service said sukuks


when the Shia in eastern Saudi Arabia finally start the revolution...

DEFAULT and move to Beverly Hills and/or Zug


Newsboy's picture

Hey, I wanna make war against shale, too.

Where's my ZIRP loan?

ugmug's picture

It is against Islamic law to borrow money. The Saudi Royal Family will have to hire a dominatrix and perform a jihad against themselves.

Offthebeach's picture

It's only borrowing if you plan to pay it back. If you're just tricking kafir tax serfs out of their money that's different. Now it's just financial infidel raiding. Totally allowed if not even blessed.

Clowns on Acid's picture

Uggie ...good comment. However only Usury is outlawed in Sharia... not "borrwing money". They offer the "bonds" in the form of an equity. I know tamahto / tomayto ... but here is a huge (and growing buisness in Sharia compliant debt .... I mean equity offerings.

The central planners's picture

Its against muslim law to lend money and charge interest that why the FED made ZIRP. Now they can claim that they are muslims.

DirkDiggler11's picture

Fuck those towel headed sons a bitches. The only thing I would lend those snakes would be the receiving end of my Bushmaster or some nice 12 Guage Slugs from my Browning.

JustObserving's picture
Cash-Strapped Saudi Arabia Hopes To Continue War Against Shale With Fed's Blessing

It is Obama's war against Russia and Putin.

Please do not insult the intelligence of your readers - though you are free to insult your own.

Stakes are high as US plays the oil card against Iran and Russia

cro_maat's picture

True, but my favorite part is where Morgan Stanley admits that ISIL is now part of OPEC (selling stolen oil for $20 / BL

"But persistently low crude prices - which, if you believe Morgan Stanley, are at this point driven pretty much entirely by OPEC supply - are taking their toll on producers the world over."

Stained Class's picture

Great story, Saudis are getting more USD now by selling bonds than by selling oil. Brilliant!

Icelandicsaga...............................................'s picture

As the Marlon Brando oilman tells his hen hman when he starts bitching about  what the Arabs are doing...he says SON, WE ARE THE ARABS. This helps western big oil squeeze out more independents as they did under Clinton in vthe 90s. When they are ready ..the price at the pump will jump.

Freddie's picture

Yes.  Killing shale is killing independent energy companies.   The Saudis?  There main oil field Ghawar is 60+ years old and they have to pump seawater in to keep up the pressures.   The western oil companies was over pumping it in the 1970s which damaged the well and the Saudis have done the same thing.

The Saudis buy endless crap from General Electric and do endless deals with them.  Falling oil prices, dying wells, a war with Yemen, growing younger population used to free stuff, govt spending must be off the charts,  too many Shia, too many Yemeni tribal Saudis plus a more canny and intelligent Persians who hate the genocide the House of Saud has done in the Middle East. 

Something is gonna give.  Seems like they are burning the candle at both ends.

buzzsaw99's picture

it sounds like they are cooperating with the global ppt by borrowing instead of selling more assets.

nakki's picture

They bought and own a lot of Citibank 80% higher. So they got that going for them..

RaceToTheBottom's picture

Wait, the US tax payer bailed out the Saudis?

Now, that doesn't seem fair?  I specifically requested my funds go to Libraries for small, smiling black children....


Wahooo's picture

The Saudis, the Chosen, the Chinese, the EU oligarchs. Libraries and smiling black children? Not so much.

Wahooo's picture

This sounds awfully bullish for stocks. There will be significant pressure on the Fed to keep ZIRP. We're going higher!

Sages wife's picture

John Perkins is a hero. I'm surprised he isn't in exile in an embassy somewhere.

Salah's picture

"war with shale"?  how about: Iraq, Iran, Namibia, Guyana, Argentina (Vaca Muerta), Oz, Timor, Aruba, Curacao, the Falklands, Sao Tome & Principe, Libya, Cuba, et al.

pachanguero's picture

Fuck the Bush family.....I mean the SA's.....

Reichstag Fire Dept.'s picture

All of the over supply of oil is US oil. Obama's "Energy Independence Plan" fired up US oil drilling to the detriment of the oil price. Why? To destabilize the Russian economy. It's not working.

As a result the US$ is not being spent into the global economy to act as world reserve currency. Since that time we have seen the advent of the AIIB and the BRICS Bank to fill the void.

Thanks Obama!

Keyboard Kommando's picture

Islam: Party Like It's 1299!

Chad_the_short_seller's picture
Chad_the_short_seller (not verified) Aug 5, 2015 10:26 PM

FED, please give Saudis all the money they want and keep this oil crashing going because I want to make a lot of money in my OAS, CLR, and WLL puts!!! All three of them are headed to ZERO if this continues. I promise I'lldonate some of my winnings to the wonderful state of Israel and help the good guys out!!!!

silverer's picture

Chad, are you up late drinking again?  Just ask Hillary:  You keep all your winnings!

silverer's picture

Remember that TV ad "VD is for everybody".  Great ad.  So set this one to the same music: "Zero rates are for everybody, not just those that are rich..."

WezTheJuic's picture





Feeding who?






Ps.  Hm, first time.

Nick Jihad's picture

I'm just happy to have lived to read a headline containing the words "Cash-Strapped Saudi Arabia". If I live long enough to read a headline with the words "Starving Saudis", that'll be icing on the cake.

cwsuisse's picture

Apart from the highly speculative question who is doing what and why, it is striking that the explorers waste limited resources (that soon are going to be terminally exploited) for very little money. Would it not be more prudent to sit the situation out at reduced production and save the resourcess for a later day? But maybe it is to a lesser extent a fight among the producers and to a larger extent a fight of the producers against renewable energy. The economic balance of investments in renewables is anyway lousy but at current prices for hydrocarbons renewables do not make any sense for the time being. The continous speculation about the future financial problems of countries like Saudia Arabia or Russia seems naive to me. These countries do not only own substantial natural ressources that can be exploited at very limited cost (contrary to the US which needs to spoil its nature and use-up its water ressources for the very limited benefit of squeezing hydrocarbons out of the soil for 2-4 years) but also have a very low indebtedness and fairly small population to manage in comparison to the US which is overindebted and is about to loose its status of a constitutional state under Obama. Lashing out at these countries seems to me highly inappropriate.

JenkinsLane's picture

Me thinks the ultimate casualty of the Saudi Oil War of 2014- xxxx may well turn out to be the House of Saud.