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More Bad News For Oil: Saudis Are Handling Crude Crash Better Than Expected
We’ve spent quite a bit of time this year documenting Saudi Arabia’s fiscal bloodbath.
In the wake of the kingdom’s move to deliberately suppress crude prices in an effort to preserve market share by bankrupting the US shale complex, Riyadh found itself in a tough spot. Thanks to ZIRP and the wide open capital markets it fosters, US producers were able to stay afloat for longer than the Saudis likely expected.
Although the cracks are beginning to show (the US has seen the most oil and gas bankruptcies since the crisis this quarter), the damage was done. Thanks to the fact that the monarchy needs to maintain the everyday Saudi’s standard of living (not to mention continue to feed the American MIC by spending billions on weapons) implementing budget cuts is a tall order, so when oil revenue collapses, the red ink piles up quickly.
By the summer, it was readily apparent that the Saudis were set to run a budget deficit on the order of 20% of GDP. That risked imperiling the country’s vast SAMA war chest and so, the Saudis tapped the debt markets to offset the reserve burn.
Here's a look at deficit forecasts from Deutsche Bank...
...and here's a bit of color on the relationship between reserves and crude prices from BofAML.
Maintenance of the riyal peg - which the market pretty clearly thinks may fall - only adds to the pressure.
On Monday, we got the official numbers along with projections for 2016. For this year, the deficit will come in at around $98 billion, or, somewhere in the neighborhood of 15-16% of GDP. For 2016, the Saudis say spending could hit $224 billion while revenue should be roughly $137 billion, for a deficit of $87 billion or, about 12.8% of GDP. As you can see from Deutsche Bank's projections shown above, that's markedly better than expectations for this year and basically in line for next. According to Fahad al-Turki, chief economist at Riyadh-based Jadwa Investment, who spoke to Bloomberg by phone, the budget is "probably based on $50 bbl crude," which may well be the best indicator of all when it comes to predicting where prices go from here.
“The economic council worked to strengthen the efficiency of non-oil revenue,” Saudi official Hindi Al-Suhaimi said, explaining how Riyadh managed to hold the deficit under market expectations. We also learned on Monday that the monarchy may be looking to rollback the generous subsidies that weigh on the kingdom's budget. Here's the Saudi press agency:
Reviewing government support, including revision of energy, water, and electricity prices gradually over the next five years, in order to achieve efficiency in energy use, conserve natural resources, stop waste and irrational use, and minimize negative effects on low and mid-income citizens and the competitiveness of the business sector.
Recall that the Saudis are paying a heavy price to pacify the masses and ensure that some type of Arab Spring event doesn't come to Riyadh. Here's a bit of helpful color from Deutsche Bank:
The largest energy subsidy beneficiary is the end-consumer in the form of fuel (petrol) subsidies. Bringing up the price of petrol to levels in the UAE, which earlier this year eliminated the petrol subsidy, could provide the government with USD27bn incremental revenues, or 20% of the budget deficit. However, this is a highly unlikely scenario given the demographic differential between KSA and UAE and the socio-economic impact that such an outcome (blended prices rising from USD0.11/l to USD0.5/l) could have within the country.
The Saudi government could look to increase electricity tariffs. This would be a challenge for residential consumption (51% of aggregate consumption) given the political/social impact, though it would present the highest incremental revenue benefit. Bringing up the electricity rates for industrial/commercial consumers to UAE levels could raise incremental revenues of USD3bn, which, while higher than those from the chemical sector feedstock impact, is still only 2.3% of the budget deficit.
What all of this seems to suggest is that the Saudis are holding up better than expected amid the price slump, which is bad news for shale as it means "lower for longer" oil prices.
While a 16% deficit this year and an expected ~13% deficit in 2016 certainly isn’t "good" news, Riyadh has apparently found ways to slow the bleeding which of course means they can continue their war of attrition for a while longer. Throw in the fact that the kingdom came into the year with virtually no debt and SAMA reserves on the order of 700 billion and the stage is set for further pressure on crude.
And speaking of crude, WTI plunged back under $37 earlier today after Iran said it plans to add 500 b/d to the global deflationary supply glut just one week after sanctions are lifted.
Hang on US producers: the next six months are going to be rough.
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What, you mean the news we were fed was bullshit!!??
"Oh yeah, don't worry, those motherfuckers are about to cave"
Yeah at this point in time I will believe the words of anyone over US economists and bankers.
this is not news... I've said many times before, the Saudis are going to the bond market to fund their price war and will have more than enough money in the war chest to ride things out...
expect oil to be at these price levels for the next five to seven years barring all-out WW3... the Saudis themselves don't believe oil will be back to ~$95 US per bbl until around 2040 and are planning accordingly...
as for the US, the real news is in natural gas which has been completely monkey hammered in price, yet still shows no sign of going back up any time soon... all I can say is, if you're a large natural gas consumer lock in these prices now, you'd be a fool not to...
Hello!
Do you have any sources to corroborate this assertion?
Fair disclosure: I want this to be true! Cheap petrol? Bring it on!
Deflation just guarantees collapse.
As the US Dollar is backed by ENERGY then the USA will not be able to pay her debts...as if that were ever going to happen anyway...
When the US A goes down...it will take down the US Dollar.
Now those TOXIC INSTRUMENTS OF DEATH are reserves held in most Foreign Central Bank Vaults.
As a result the Foreign Central Banks become INSOLVENT. If any of them are still standing, as it is forecast the the USA will be the last to fall, then the Foreign Governments will be taken down as well.
Inflate or DIE. That is what the perpetual Growth Paradigm is all about.
Deflation is death.
So yeah. Bring it on.
It is time that planet Earth loses 3 or 4 Billion inhabitants.
It has been forecast that the the USA will lose about 140 Million to 180 Million people over the next decade as a result of this collapse.
Bring it on. Kill off the weak, the children, and make lack and famine the order of the day in the USA...just so that you can enoy cheap petrol.
Of course the Deaths will stifle any demand.
Is this Too Tall Tom?
I think some of what you are saying is true. The Idea that Saudi Arabia can sustain multiple year losses and regain the loss with a pipeline across Syria don't make sense. There has to be a point of no return but people been doing stupid things for millenniums. The idea that they are trying to put shale producers out of business is ludicrousness.
The dollar is backed by a dream which will continue until someone pulls the plug on it. Then all hell will break loose. I think when it happens (because of modern communications) it will happen in a matter of hours. We are coming to the end of the petrodollar and what happens next is any ones guess. War is a usual way out.
Speaking form the Texas oil fields here.. The weak players are definitely going to be weeded out... That being said the survivors are going to be lean and mean... And we are figuring out how to not only survive but thrive at these prices levels or lower. Technology and yield per dollar spent are not standing still. There will be carnage… But everyone that survives is going to be smarter and more efficient. And when the boom comes again… Everyone will be playing with an improved game. I think the Saudi gamesmanship may not have fully taken this into account.
http://www.bnn.ca/News/2015/11/25/Big-corporate-Christmas-parties-on-the...
the Saudis realistically have 5 to 7 years of window to work with, which is just about how long it will take for US oil tech to innovate and get those new innovations into the patch... after that the crystal ball becomes more opaque...
I disagree.. Everyone is very motivated to make changes now. We are seeing it already. Look at the rig count compared to production. The rig count has crashed and there is barely a dent in production. We are getting way more for way less already.
Re Silky - " I will believe the words of anyone over US economists and bankers."
I am sorry but those stories about the Saudis about to collapse economically and socially were also penned and posted right here on Zerohedge repeatedly. Including stories about hidden internal war within the Saudi family and how it's unity had already collapsed.
Brent looking for a place to go and die. Tango Uniform on the 120 chart.
I don't care what the reason is. If it keeps petrol prices low, carry on doing what you're doing!
Are those ragheads waiting in line for a goat?
Nah, Nah ------ O-- bah--ma
No, they're waiting for their turn in Saudi Idol. The winner will be the one who can laugh the best at the stupid fucking Americans who they fuck harder and more often than the prettiest and hottest goat in the entire Kingdom, while also chopping off the head of a randomly selected infidel, just because they can...
No...
They were told that they were going to get some free K-Y Jelly...before meeting with Michael...er...Moochelle..
And they thought that they were going to be the pitchers rather than the catcher...
As Jim Nabors would say, as he was one of that persuasion...
Sooprise...Sooprise.
I dont know why they are in line but where is the machine gun what an opportunity.
So, if they are surviving and hammering the US shale industry so hard...how is it again that these Saudi clowns are US puppets?
Can't somebody pick up a phone and say "put a plug in it!"?
Wait a sec...who are those clowns working for?!
That premise assumes that the "puppeteers" would have the interests of the American oil industry in general as their motvation. I have said from the beginning that premise was wrong. The elimination of small players and consolodation of the marketplace was always an objective. The "harming Russia's position" rationale was merely cover to fool dummies.
Well, thank God the Saudis are doing OK. What a relief.
has nothing to do with the US producers... Its an attempt to break Putin......
I wonder what a table cloth in an italian restaurant in Saudi looks like.....
But they are also breaking the US and Canadian oil. This an act of war in all but name, using oil as the weapon.
At what point does their list of enemies become so vast (in size and compositions of alliances), that this boomerangs on them, and there is at least a clandestine attack on them -- if not an outright military attack?
'That which cannot be sustained or tolerated, will not be sustained or tolerated.' -Kirk
This is oil embargo in reverse, this time to keep the West cpmpliant/dependent and Russia economically on the defensive, especially with sanctions and restricted access to capital markets. Worked so far, I think we'll see fresh price minimums in the year ahead as well huge wave of M&A's in shale sector. I wonder if Saudis would want to participate in consolidating US shale players.
Saudi Aradia made money hand over fist for many decades w prices at $20/barrel.
If the intent was to destroy US competetion then is would make no sense to stop now and let US shale live to fight another day.
"Saudis Are Handling Oil Price Crash Better Than Expected" -- How can anyone really be sure? Are their numbers anymore reliable than the ones out of the US or China.
One thing for sure though, since they sell so much oil in dollars, they are surely wondering if they should be accepting other currencies (Bankers wouldnt like that) and if they dont do that, they are probably the short side of the dollar trade to protect the value of their currency reserves--so that would lend us to only imagine who is sucking up all the long side with the dollar at such a lofty level? Yet another bubble yet to burst.
Better than expected. Having $100+ oil for such a long time now seems like just a buffer and with that in mind suggests all of today was certainly known about before hand by someone. Wonder when the income buffer is empty how long it will continue
Don't forget the virtually unlimited military and financial aid they can expect from Uncle Sugar, what amounts to a blank check from Aunt Janet as long as they keep oil below USD40, keeping blue-state America's economy propped up and Trump out of the White House.
Don't count on that USD50 barrel while Hillary's coronation is at all in doubt.
a quick drop to 4 or 5 dollars a barrel would be nice. wasnt there a time a few years ago when NG spot price went to almost nothing for a short period?
BULL SHIT!!!
Not as long as the USD hangs over it like the albatross of death that it is every second of every day since 1971!
Is that a photo of the bathouse, barry goes to?
Is that a photo of the bathouse, barry goes to?
Israeli Jews and American goys Welcome... Just as long as they bring the only currency they're allowed to spend their profits in!
One can only imagine how beyond filthy rich the dumb as "pig shit" dirty little towel heads would be if they made a deal to dump the Anglo-American USD en masse in favor of Russian and Chinese currency before 2011?!!!
Too late... Too late... Too late!
I live in the Bakken shale area of ND. Canada is being hit hardest so far. Estevan, SK oil business has seen a big downturn. A heavy equipment operator laid-off all employees and now their wondering how to make payments. Airports in Minot,Williston, and Dickinson have seen large declines in passengers. Cars have been giving back to the banks. Repo cars are quietly taken to other cities to be sold.
Rig count this morn is 62 and is a new post boom low.
Lots and lots of new apartments for rent. Motels business is down at least 40 percent. Drillers are still drilling but they are not fracking the wells. Over 900 wells are waiting for completion.
The Thinking by business and government "leadership" is the price will return someday. Boom and bust. We are a patient and stupid bunch of people up here in North Dakota.
Fully expecting a fire sale on F150's next spring.
"oil business has seen a big downturn"
I can see that, and from reading here at ZH I see projections of impending doom in the banking community that has financed the shale-oil boom. Why is it that when I go to the FDIC Failed Bank List I don't see any smaller players recently listed (from those regions)? Is it still too early for that level of pain? I would have thought that just the downturn in consumer financing (due to job losses) and repossessions would have started the ball rolling for smaller regional banks.
I am from Montana. My Dad said there are half built apartments and motels in Williston. They used to have people in work camps who now are filling the existng motel and apartments.
Who knows where this leads in '16 when those existing properties become vacated.
Boom go bust
Meanwhile Iran and Russia look forward to by-lateral trade agreements outside the USD.
https://z5h64q92x9.net/proxy_u/ru-en.en/news-front.info/2015/12/27/rossi...
Iran cancels legal action against Russia over S300 system.
http://fortruss.blogspot.co.uk/2015/12/iran-confirms-withdrawal-of-lawsu...
Iran and Russia outside USD and Iran with S300s - that will keep the Saudis at bay, if not the ZionAzis.
We were told there were already by-lateral trade agreements outside the dollar a couple years ago. Russia still uses the dollar for most of it's trade and is dragging it's feet or cannot get customers to accept the ruble. China forces Russia to use the yuan.
We were told over a year ago that Russia would NOW deliver the S300 or better in a couple months - to finally honor the 2007 contact Russia has with Iran (and Syria) but then refused to honor (no integrity is there). Putin did not do so. Then almost two months ago the story was issued that Putin would now deliver the S300 or better within two months. Putin did not. Now in the last week they issued new stories that Putin would honor the agreement - in a couple months (again).
And why did Putin refuse to honor the 2007 contract with Syria to supply the missile systems? Why did Putin watch as Syria was expended and destroyed? Because that is what he wanted, he does not want or care about an independent Syria. Russia has betrayed every allie they have had in the ME and will betray Iran when it is time.
What Russo-philes on ZH won't tell you, or admit to, is that there are several factions within the Kremlin, just as there are in almost any government.
Putin appears to have a free hand to the outside world, but does not in reality.
This would explain perfectly why he does not act with Terminal Consequence in several areas. E.g.,
> Back the Ruble with Oil and Gold;
> Force the EU to pay for gas/oil in gold-Rubles or in gold;
> Won't impose an NFZ in Syria, won't take out the tanker pipeline with conventional munitions (carpet bombs, airborne machine guns) or with FOABs;
> Uses MIC high tech (Smart Bombs, Rockets, Cruise Missiles, Drones) to showcase the latest Russian MIC toys;
> Keeps delaying deliveries of S300 to Iran
> Won't retaliate against EU's airway ban for RAF flights to fight ISIS, by banning EU flights to Asia via Russia;
> Won't defend Syria's southern border from land encroachment/assimilation by Israelis and their Jihadist/ISIS allies;
> All Russian sanctions against the West and Turkey only hurt "the little people", but not oligarchs or bankers
> Hasn't cut off the West from the ISS.
> Still hasn't launched the Russian version of SWIFT. (China hasn't launched their version, CIPS, either.)
Each can be explained away on its own, but... as a group, as a Preponderance of Evidence, this makes it clear that Putin's powers have their limits -- even within the Kremlin. I also strongly suspect, that it is the Chinese who keep the Russians from taking stronger actions. I would not be surprised if their bartering/dealing with the US has something to do with it, because China always looks only after China (and its billionaire Oligarchs).
Perhaps that is exactly why the Ukies, EU, Turks and now Saudis are all willing proxies of the US (and its masters), in ratcheting relentlessly and why they keep doubling down on Russia: Their view and conviction is that eventually Russia will crack, if enough of the right kind of pressure is applied, for long enough. Theirs is not the strategy of a chess game, but a game of deception, stealth, and sudden strikes. Theirs is Wilderness Survival: that of the Boa encircling and squeezing the Bear.
p.s. FWIW, alhtough I tend to agree with what the Russians are doing is correct and the right thing to do, my divergence lies in that I want to see a less Dovish and a more Hawkish version from Moscow: a version that addresses the collection of Irrational Anomalies cited above. A persistent Dovish approach makes me suspicious of Putin's multi-prong Agenda and imposed Constraints.
Gas and Heads being monkey hammered.
One by the market the other by the Raqa sword. Two swords of God's vengeance on man.
And Trump says : "Vengeance is mine! I'll even up with the Clintons, the neo-Clantons, at OK Corral where I'll play at Wyatt"...Some sword he wants to wield.
Three swords gnashing and gashing and you have Cerberus the three headed dog of Hades that barks like Hell on wheels.-- "I'm a-coming to Riyadh to bite your butts! Like the chimes of Hell's bells!" --Said by none other than Al-Baghdadi, the big daddy of Sunni Jihad.
"I want my money back"...sounds familiar to me. Who sings it now? The Chinese? The oligarchs of Tar Sands and Frackland? The sheikhs of Dubai gone gold buggered and sand storm rattled by the empty quarter coming back with black fangs? The Czar of Putinstan gone Gazprom depleted without fizz ? The Queen of Brazil who faces the impeachment wall of lamentations?
I guess they all do; the headless and the headfull of 'vengeance is mine' playing at God in land of Moab or in land of cocaine that has the biggest bang on the phucked up buck-a-dead-duck called Indian Man's Nirvana Reserve.
Markets are for junkies who just love lasers doing Gods work for them.
And the FED says : 2016 will be a banner year! But for whom?
No worries, everything is fine, the Saudis are our friends and allies. Here, have some bread and lets watch the circus.
How will they fund their Yemeni genocide now?
Kind of strange for the article to mention effects on the non-exportable US shale patch that competes with the Saudi's for no markets outside the US borders while FAILING to mention effects on the Saudi's main competitor for energy exports - Russia.
Why avoid mention of the elephant in the room, and instead mention the mouse in the next room????
Makes no sense to structure an article this way.
No sense...to YOU.
This crashing oil price might be what is keeping cargo ships afloat at such devastatingly low transport rates.
this article is misleading here is my opinion
saudi arabia need $100 a barrel to breakeven for its budget.90% of its revenue comes from oil exports. so 20-30 dollars a barrel is bad.
it also doesnt mention that the sudis are fighting in yemen,who the houthis are doing well and have also taken a bit of land inside saudi arabia.saudi arabia needs to pay for merceneries to fight the war.
also saudi arabia would find it difficult to raise taxes because majority of the people their are bribed with benefits to keep them content.
also 20% of the population in saudi arabia are shiites who are 2nd class citizens and pretty much live where the oil is which is along the persian gulf.these people are the wildcard.
the place is ripe for the taking for russia,iran,isis,al queada and us defence contractors
Every businessman knows :
no one has survived
by reducing the prices of their products
This time these entire countries will go bankrupt
sooner or later
Yeah, but lower oil prices is a positive supply shock! Next time there is another sharp decline in oil prices from another peak, will the great and good of the economics fraternity learn a lesson or roll out this same line of argument/excrement?