Saudi De-Peg Looms As FX Market Signals Loudest "Black Swan Warning" In 13 Years

Tyler Durden's picture

As we noted recently, BofAML fears "a depeg of the Saudi riyal is the number one black-swan event for the global oil market in 2016," adding that it is "a highly unlikely but highly impactful risk." Given the recent action in Saudi Riyal forwards - the market's best guess at where the oil-ruch nation's currency will trade in the future - the chance of the black swan 'de-peg' is its highest since 2002. Besides this morning's "whatever it takes" moment, which oil markets quickly shrugged off, amid heavy subsidies to keep the people calm and the costs of wars in Yemen (and more in Syria), weak oil revenues leave The Sauds with few options (outside of the load the nation with ever more debt program): It's either stop it with the whole flooding an oversupplied market strategy, or let the peg fall before reserves runs dry.


SAR Forwards indicate the highest de-peg conviction since 2002...


And notably, the de-peg is a lot more palatable than losing face and cutting crude production...

“It is a lot easier politically to implement a modest supply cut at first than allow for a full-blown currency devaluation."

As we detailed recently, BofAML calls a Saudi de-peg the "number one black swan event for the oil market in 2016."

For oil, however, the most crucial point is what happens to Middle East currencies and in particular to the Saudi Riyal. In fact, Saudi Arabia’s FX reserves are still high and point to an ample buffer for now, but they have been falling at a relatively fast rate (Chart 21). However, should China allow for significantly faster FX depreciation than is currently priced in by markets, we believe oil prices could fall further. Naturally, the FX reserve drain on Saudi could accelerate to $18bn per month if Brent crude oil prices average $30/bbl (Chart 22), sharply reducing the Kingdom’s ability to retain its currency peg. 



Saudi has been forcing prices lower by increasing production into an oversupplied market so far (Chart 23), and it also rushed to issue debt in its local market to fill a soaring budget gap. We have previously argued that Saudi Arabia’s surging output is responsible for almost half of the 520 million barrel global petroleum inventory build in the last 7 quarters. Can the government maintain this strategy of flooding the oil market? In our view, it is unlikely that Saudi leaders would want to exacerbate its ongoing reserve drain by pushing prices below $40/bbl. After all, pressure will quickly build on the riyal’s 30 year peg to the USD (Chart 24) if Brent crude oil prices keep falling. And frankly, it is a lot easier politically to implement a modest supply cut at first than allow for a full-blown currency devaluation. But a CNY meltdown could ultimately force Saudi’s hand.



In short, a depeg of the Saudi riyal is our number one black-swan event for the global oil market in 2016, a highly unlikely but highly impactful. 


However, if Saudi cannot resist the gravitational forces created by a persistently strong USD and depegs the SAR to follow Russia or Brazil, oil prices could collapse to $25/bbl. Weaker commodity prices would in turn add more downward pressure on EMs (Chart 26). Thus, even if micro supply and demand dynamics are improving, the path for oil prices in 2016 will heavily depend on how the USD moves against the CNY and the SAR. Or on a Saudi supply cut.

And there you have it. It's either stop it with the whole flooding an oversupplied market strategy, or let the peg fall before SAMA runs dry. Bear in mind that it's not just falling crude, the peg, and generous subsidies that are weighing on the Saudis. There's also the war in Yemen and the prospect of a stepped up role in Syria.

Time to choose...


Charts: Bloomberg

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Manthong's picture

Peak shallow oil, MF’s?

We are swimming in fossil energy, so it’s time for some terror to put our heads straight..

It will be done with guns this time to align our heads with Obama’s next, last initiative.

Paris was a pea shoot compared to what is coming next.


falga's picture

local fuel subsidies are killing the Saudi treasury. They have no choice but to devalue...

johngaltfla's picture

Fuel subsidy costs pale in comparison to the cost of the war in Yemen and funding ISIS.

BKbroiler's picture

And notably, the de-peg is a lot more palatable than losing face and cutting crude production...

“It is a lot easier politically to implement a modest supply cut at first than allow for a full-blown currency devaluation."

Am I drunk or do these two statements contradict each other?

wintermute's picture

Indeed. I re-read this several times because it is important to the author's article.

All I really want to know is whether a de-peg is likely but this contradiction means that we need to look elsewhere for answers.

secretargentman's picture

If "more palatable" and "easier" are synonymous then yes the two statements are contradictory.

Otrader's picture

There's always the good folks at the IMF.  All you have to do is put up some oil fields up for collatoral. 

. . . _ _ _ . . .'s picture

From Nov. 17

"The US State Department has cleared the sale of $1.29 billion worth of smart bombs to Saudi Arabia. The purchase will replenish supplies used in recent air strikes against both Iranian backed Houthi insurgents in Yeman[sic] and Islamic State forces in Syria. Details of the sale were posted by the Defence Security Cooperation Agency (DSCA) last Friday and follow last months shopping spree by the Saudis which totalled $11.25 billion."

johngaltfla's picture

FYI, the Saudis have been recalling physical gold from the Fed and selling it directly to the ChiComs so they have some form of continuos liquidity. They are estimated to run out of gold reserves by early 2017 at the pace they are supposedlyi liquidating...

Truther's picture

The day of reckoning has arrived for the freaking Saud Family.

Bananamerican's picture

"from your lips to Allah's ears"

nosam's picture

Well before that happens, they are going to told that they cant have any more gold back.

Day_Of_The_Tentacle's picture

@ JohnGaltFla

Interesting! Where does this information come from? Do you have backup material or links? Thanks.

bamawatson's picture

you asked a logical question of sir nosam; i am too lazy to supply you links or info; but i will call n raise nosam, and say they already Know their gold is gone

((still a classic ))

Quus Ant's picture

I drink your milkshake, Iraq!  I drink your milkshake Syria!  I drink it up! 


Yen Cross's picture

 I agree.

  It's pretty hard to gain any Pro-forma insight, when the charts are owned by arms dealers.

hungrydweller's picture

Whatever.  Easy fix.  The Sauds issue massive debt and the Fed buys it all up in the next QE.  Oil prices rises shortly thereafter and everything is hunky-dory.

slicker's picture


"Saudi De-Peg Looms As FX Market Signals Loudest "Black Swan Warning" In 13 Years"

An oxymoron??  If you know it's coming by definition it isn't a black swan.

Fed-up with being Sick and Tired's picture

....It is a black swan by definitiion if it is considered a ultra-low probability.

Vlad the Inhaler's picture

IMF says Saudi has cash until 2020 at sub $40 oil, plus they can always sell bonds.  They won't give up now, they are kicking shale's ass, and know US cyclical recession is coming soon too.

GMadScientist's picture

saudi-foreign-reserves-drop-to-the-lowest-level-in-32-months... yeah, they'll be fine, especially with huge expenditures to blow up MSF hospitals and fight every angry teenager in Yemen and their own kingdom.

Niall Of The Nine Hostages's picture


With the Fed officially out of ammo, oil at USD40 a barrel is the new stimulus package. Keep gas cheap enough and sooner or later the proles will start spending money on crap they don't need again (supposedly---it's not working as hoped).

This will be enforced by giving Riyadh unlimited credit at the Fed. There's the helicopter money everyone talks about---except those pallets of Franklins are being handed out to Saudis, not Americans.

Giving it to Americans would be something for nothing, you see. They owe the Sauds. Having to pay fair value for oil---north of USD200 a barrel---would leave the peoples of North America and western Europe the choice between mass death from hunger and cold or tax and debt revolt, because it won't be possible to pay full price for oil and pay for the luxuries of rich parasites in New York, London and Frankfurt (never mind DC and Brussels). When Riyadh falls, so will the Empire.

The peg will hold till the Sauds are driven from Riyadh by Russian tanks. Not a moment before. 

Soul Glow's picture

It will have the impact that the Chinese RMB depeg had, and that sent markets into freefall.

GMadScientist's picture

Need liquidity? Think liquidation!


secretargentman's picture

Serious question: when the time comes, how do I actually buy a barrel of oil? Don't want it delivered. Presumably they don't rehypothecate oil like they do PMs.

Main_Sequence's picture
Main_Sequence (not verified) Nov 24, 2015 1:29 AM

Gaddafi and Saddam know what happens when you try to supplant the Petro D'Allah.  In Fact, Saudi Arabia would have turned into an Iraq if it were not for the Saud's cutting a deal with the USSA according to John Perkins, who authored "Confession's of an Economic Hitman"

Otrader's picture

John Perkins, who authored "Confession's of an Economic Hitman"

Great book.

Main_Sequence's picture
Main_Sequence (not verified) Otrader Nov 24, 2015 5:10 AM

Yes agreed.  Is there an echo in here? ;)

SSRI Junkie's picture

this too must be bullish for us stalks

Panic Mode's picture

Yeah, I am pro de-pig the Saudi.

GMadScientist's picture

Sorry, that stench ain't never comin' out.

Expat's picture

Y'all might consider reading the book by Taleb before tossing around the expression "Black Swan".  The simple act of naming the possibility or even thinking about it renders it a NON black swan.  A Black Swan event is something not only unexpected, but inconceivable.  It is your six year old son divulging he is the Grand Wizard of the KKK.  It is your neighbor being an alien from another galaxy.  It is Sarah Palin naming five European countries without looking in an atlas.

Just saying.

bobert727's picture

Clearly this is transitory

GMadScientist's picture

Perhaps, in the sense that petroleum and modern civilization are also transitory.