Saudi Default, Devaluation Odds Spike As Mid-East Careens Into Chaos

Tyler Durden's picture


Saudi Arabia just doesn’t know when to quit. 

The kingdom’s plan to deliberately suppress crude prices in an effort to bankrupt the US shale space and preserve market share has cost Riyadh dearly over the past 12 months. The country’s budget deficit for 2015 ballooned to some 15% of GDP as oil revenue collapsed. For 2016, the deficit is expected to come in at a still elevated 13% of economic output.

The red ink has forced the Saudis to tap the SAMA reserve war chest as well the debt market. In a testament to how dire the situation has become, Riyadh also moved to cut subsidies on everything from fuel to electricity to water in order to buy some budget breathing room. The welfare state overhaul was necessary because the Saudis aren’t keen on i) dropping the riyal peg, or ii) rolling back the defense spending.

As if the situation needed to get still more precarious, Riyadh went out and sparked a sectarian showdown over the weekend by executing a prominent Shiite cleric. The Sheikh’s death triggered protests in Iran (among other countries) and before you knew it, the Saudi embassy in Tehran was on fire. That prompted Riyadh to cut diplomatic ties with the Iranians and comments by Saudi Foreign Minister Adel Al-Ahmad Al-Jubeir seem to suggest that the kingdom may be on the verge of taking more steps to intervene militarily in the region in an effort to rollback Iran’s growing influence and stop the Shiite crescent from waxing.

Of course war is costly and is generally accompanied by quite a bit of uncertainty. And if there’s anything the Saudis absolutely do not need right now, it’s more expenses and more geopolitical ambiguity. In a testament to just how unwelcome the events that unfolded over the weekend truly are, Saudi CDS is blowing out to six year wides...

...while the implied odds of the vaunted riyal peg finally breaking are at record highs...

One has to believe that something is about to snap here. The only question is whether it will be the peg or the patience of the Saudi populace with a government that seems hell bent on dragging the country into the financial and geopolitical abyss.

*  *  *

Bonus: For those who might have missed it, here's BofAML's take on the "number one black swan event for the global 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.

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Mon, 01/04/2016 - 12:33 | 6995417 Looney
Looney's picture

John McCain’s best friends are hurting.

His facial hernia is about to explode right… about… now!  ;-)


Mon, 01/04/2016 - 12:42 | 6995454 Chuckster
Chuckster's picture

Like your posts Looney!  High octane I.Q.





Mon, 01/04/2016 - 12:46 | 6995463 y3maxx
y3maxx's picture

Will the American Dollar plunge in value?

Trouble continues brewing, behind the scenes, in Washington.

W W #3 now on the horizon.

Mon, 01/04/2016 - 12:47 | 6995474 highandwired
highandwired's picture

I want to see oil in the teens!

Mon, 01/04/2016 - 12:53 | 6995513 zorba THE GREEK
zorba THE GREEK's picture

Zorba would like to see some oiled up teens too.

Mon, 01/04/2016 - 12:58 | 6995540 clooney_art
clooney_art's picture

The country that exports the most terrorists and converts people to terrorism has executed a "terrorist". WTF ?

Mon, 01/04/2016 - 13:00 | 6995550 new game
new game's picture

chaos, just as planned! where is the calvary with the merican flag? oh, looky over there! they are coming over the crest...

oil, baby oil...

Mon, 01/04/2016 - 14:52 | 6996123 petroglyph
petroglyph's picture

It's either ww3 or all the worlds politicians will have to tell the truth, at the same time about unfunded liabilities. Odds don't look good, especially if you have kids of military age or need SS.

I'd sooner believe in Numuru than the politico's all getting a conscience.

Mon, 01/04/2016 - 12:47 | 6995478 Save_America1st
Save_America1st's picture

and let's not forget about their current war with Yemen and just as bad has been their involvement with U.S. gov traitors who created, armed, trained and funded ISIS in Iraq and Syria. 

And of course the same "folks" helped perpetrate the 9/11 attacks. 

Fuckin' Saudi scumbags. 

Mon, 01/04/2016 - 13:36 | 6995744 o r c k
o r c k's picture

But does looney have any tunes ?

Mon, 01/04/2016 - 12:49 | 6995493 Realname
Realname's picture

John McCain needs an enema facial from Lindsey 'Glory Hole' Graham. Im beginning to wonder if all of this nonsense is a backdoor way for the US to get the war with Iran going.

Mon, 01/04/2016 - 13:27 | 6995694 silverer
silverer's picture

Russia already has plans for a US ploy in Iran.  They already even know the final result.  And I would bet they're right.

Mon, 01/04/2016 - 12:50 | 6995497 zorba THE GREEK
zorba THE GREEK's picture

Don't worry about world affairs, the Fed has your back (printing press) just lay back

and relax and BTFD


Disclosure: Zorba is not a licensed investment advisor and does not promise

that you will not lose everything you have by following his advice.

Zorba does predict that 2016 will be the year of the PM comeback.

Mon, 01/04/2016 - 12:33 | 6995422 Soul Glow
Soul Glow's picture

The House of Saud is fiine!

They're fiiine!!!

Mon, 01/04/2016 - 12:41 | 6995450 KnuckleDragger-X
KnuckleDragger-X's picture

Yep, things are going just swimmingly. They've been able to get by using oil as a weapon. Too bad Obozo is too scared and fickle to help, and the next President, if it ain't Hillary, is not going to be kindly disposed towards them. Interesting times indeed....

Mon, 01/04/2016 - 12:43 | 6995458 847328_3527
847328_3527's picture

This simply means moar multi-millionaire camel jocks will hide in London and USA and parts of Canada like Montreal.

Mon, 01/04/2016 - 12:33 | 6995423 Cognitive Dissonance
Cognitive Dissonance's picture

The method is well known and widely practiced. When there is (economic) trouble at home, start a war abroad.

Mon, 01/04/2016 - 12:41 | 6995449 williambanzai7
williambanzai7's picture

Off with his head!

Mon, 01/04/2016 - 12:46 | 6995468 Cognitive Dissonance
Cognitive Dissonance's picture

Bill, you had Mrs. Cog and I laughing out loud with your earlier comment.

"What a bunch of camel fucking clowns: Iranian that sounds fucking funny given what we are told is happening all around the world."

Mon, 01/04/2016 - 13:25 | 6995673 silverer
silverer's picture

It's going to be quite entertaining if the US decides to go big on a war, since they are starting out bankrupt and couldn't possibly repay the extra debt that would be created.  It would perhaps lengthen the Ponzi for a while, but with devastating results in the medium term.  Worse than the war itself, most likely, and not worth the extra Ponzi time it would buy.

Mon, 01/04/2016 - 12:36 | 6995428 Lady Jessica
Lady Jessica's picture

Winding back Saudi government expenditure will be just like draining Fed liquidity.

Its volume is such that decreases of this magnitude will be of little consequence.

Of course, a downward trajectory, if sustained, will matter.

Mon, 01/04/2016 - 12:52 | 6995472 Lucky Leprachaun
Lucky Leprachaun's picture

Not too sure about that. Move outside the main metropolitan areas are you'll see that there's actually quite a lot of poverty in SA and not just amongst the imported slaves from South Asia. A very high proportion of Saudis depend on massive goovernment subsidies without which their standard of living would decline drastically.

Mon, 01/04/2016 - 12:58 | 6995507 Lady Jessica
Lady Jessica's picture

Indeed there is significant poverty in SA (although the criteria typically applied in the West would not be ideal for the KSA).

That is why any decrease will need to be targeted to minimise political impacts (again the situation of the Fed is similar).

Mon, 01/04/2016 - 14:45 | 6996064 petroglyph
petroglyph's picture

It matters little to the guys leading salt caravan's, for them life goes on as always.

Who does get disgruntled is their "middle class", but they will shout and piss and just go on raping as always, and have to drive used cars.

Looks like everybody needs a war, worldwide. All of the governments have lied through their evil teeth. The only way they can make good on their unfunded promises is to eliminate those they promised too. Same as ever.

Mon, 01/04/2016 - 12:36 | 6995436 mtndds
mtndds's picture

Nothing will happen.  This shit will blow over in a week or two and then they will kiss and make up.  Once Kerry sticks his face into it then things will calm down.  It has happened in the past and will happen again.  Relax.

Mon, 01/04/2016 - 12:37 | 6995439 sidiji
sidiji's picture

9/11 karma...and yeah we americans knows who was behind 9/11 burn your wahabi goat fuckers

Mon, 01/04/2016 - 12:41 | 6995451 Cognitive Dissonance
Cognitive Dissonance's picture

Please, no visual images. Too early in the day. It's not even cocktail hour. :-)

Mon, 01/04/2016 - 12:44 | 6995460 MrNosey
MrNosey's picture

This is just the start of things to come, as we head for WW3 and then a disclosure that will rock the entire planet......

Mon, 01/04/2016 - 12:55 | 6995524 Proofreder
Proofreder's picture

Aaaahh - Dude; if it is a Top Secret, no one will know about it ...

Not even you.  Give it up, tired of the endless links to beforeitsnews.CIA.onandon.

Mon, 01/04/2016 - 12:56 | 6995529 Lumberjack
Lumberjack's picture
Member for
3 weeks 5 days
Mon, 01/04/2016 - 13:09 | 6995599 Chuckster
Chuckster's picture

You do some good posts and I love your picture.

Mon, 01/04/2016 - 12:44 | 6995462 Lucky Leprachaun
Lucky Leprachaun's picture

Saudis provided patsies and money.  The ZioCons did the real work on 9/11.

Mon, 01/04/2016 - 13:02 | 6995489 Son of Captain Nemo
Son of Captain Nemo's picture

Adding fuel to an already all consuming scorched earth policy.

NATO be dyin and with it the Anglo-American "Triumvirate"!!!


If you're an American soldier, sailor, airman or marine now is a good time to bail out while you still have a pair of testicles to reach down and grab.

Good news is you'll do it because you value "them"... And because you're chicken shit when it comes to the horrible receiving end you and your "buddies" will be on in places like Aleppo and Mariupol if and when you get the "green light" to fight the last one you ever will !!!

Hope you enjoy the permanent burial plot in those destination(s) because Uncle Joey and the "White Chimp" will be sending you in-Country this time without your trusty "dog tags" and American flag patch because they are courtesy of you following orders the last 14 years based on the ultimate lie (you've known was a lie since 2004) that has bankrupted your government morally and financially in which they can nigh afford the "rubber bags" to pour your rotting maggot ridden putrid carcass back to Deleware in!!!

Mon, 01/04/2016 - 12:53 | 6995508 sidiji
sidiji's picture

seems to the Saudi's increased production is maybe because.....they are DESPERATE for cash?

new saudi throat cutter in chief likes war and mercs costs money..god forbid any saudi should take up arms themselves

Mon, 01/04/2016 - 13:25 | 6995677 NotApplicable
NotApplicable's picture

In other words, it's the exact same reason that everyone is pumping all that they can. I find the "crash shale" narrative as after the fact propaganda. Sure, that's what they want to happen, but they aren't "cutting off their nose to spite their face" in order to make it happen.

The entire system is leveraged upon much higher oil prices, and thus cash flow becomes all too important for all players. Nobody has enough savings in a ZIRP world to simply shut-down non-economic production.

Mon, 01/04/2016 - 12:54 | 6995519 potato
potato's picture

Pretty funny. They need an excuse to do the inevitable (break the peg, reduce welfare). Enter stage right: Iran.

Mon, 01/04/2016 - 13:04 | 6995569 blindman
blindman's picture

08.12.2015 Author: F. William Engdahl
What Stinks in Saudi Ain’t the Camel Dung
First appeared:
Erdo?an’s US-sanctioned and Saudi-financed terrorist training camps have brought an estimated 200,000 mercenary terrorists from all over the world, transited by Turkey in order to wage “jihad” in Syria.

But that jihad, it is now clear, is not about Allah but about Moola—money. The Saudi monarchy is determined to control the oil fields of Iraq and of Syria using ISIS to do it. They clearly want to control the entire world oil market, first bankrupting the recent challenge from US shale oil producers, then by controlling through Turkey the oil flows of Iraq and Syria." fwe

Mon, 01/04/2016 - 14:11 | 6995904 petroglyph
petroglyph's picture

B-man, that is a good link. I think the Bakken was always a trojan horse anyway. Those wells decline rapidly.

Mon, 01/04/2016 - 12:54 | 6995520 Kagemusho
Kagemusho's picture

The artificial back-alley beat-down of gold is once more underway. Went from 1083 back down to 1071...all this while oil is swirling around the toilet bowl, big market losses, central banks like Sweden's getting heebie-jeebies  Saudi instability is becoming evident, and the MER's instability follows suit. Not to mention various pots boiling elsewhere in the world. How many tripwires have to be snapped before something goes BOOM?

Mon, 01/04/2016 - 13:20 | 6995657 silverer
silverer's picture

All the while they continue to sell the stuff like crazy.  Well, when sales start to get refused for lack of inventory, it's game over.

Mon, 01/04/2016 - 13:00 | 6995548 arbwhore
arbwhore's picture

Involuntary production cuts coming soon to a kingdom near you.

Mon, 01/04/2016 - 13:07 | 6995584 nakki
nakki's picture

"Let them eat sand"

King Salman bin Abdulaziz bin Abdul Rahman bin Faisal bin Turki bin Abdullah bin Mohammed bin Saud

Mon, 01/04/2016 - 13:46 | 6995788 o r c k
o r c k's picture

bin beheader

Mon, 01/04/2016 - 13:08 | 6995595 MarcusAurelius
MarcusAurelius's picture

I am both shocked and broken hearted that these assholes are having fiscal problems as a result of their greed. Too bad they didn't save anything when oil was over 80 a barrel for years. 

Mon, 01/04/2016 - 13:10 | 6995597 Lumberjack
Lumberjack's picture

Game on?



...The campaign against the ISDS contract focused on lobbying the government to cancel any contract with ISDS on the grounds that the company had close ties with the Israeli military, as well as a long and sordid history in Central and South America.

Founded in 1982 in Tel Aviv by a former colonel in the Israeli army, ISDS has provided security and “counterterrorism” training to many Central American states, including paramilitaries in Honduras and Guatemala, throughout the 1980s.

ISDS helped train and arm the Contras in Nicaragua who tried to overthrow the leftist Sandinista government. In the 1989 book, The “Terrorism” Industry, Edward Herman and Gerry O’Sullivan document how ISDS also trained and helped form anti-terrorism “squads” within the Guatemalan military to target opposition forces and grassroots organizing, while providing the military with electronic surveillance, arms, helicopters, and airplanes. Furthermore, ISDS trained Honduran death squads, including the notorious Battalion 3-16, which conducted kidnappings, killings, and torture against political dissidents.

Mon, 01/04/2016 - 13:47 | 6995802 Kagemusho
Kagemusho's picture

Not just inCentral and South America. Who do you think taught the US cops how to deal with the Occupy movement and any other dissenting group?

U.S. Cops Study Counter Terror in Israel 

The Israelification of American Law Enforcement 

After Operation PAPERCLIP, the US intel agencies began adopting the tactics and techniques of those 'imported' Nazis. In the Viet Nam War, some members of the Special Operations Group (SOG) ruefully called themselves the 'Sons of Gestapo'  courtesy of the interrogation techniques they learned from those same Nazis.

After the PNAC bunch came to power in the US courtesy of the Bush 2 election heist, take a guess who came to advise our police, our military and intel agencies? What happened at Abu Ghraib was not an aberration. It was a product of indoctrination. And who provided that? You don't have to look far. It's why police nowadays see every taxpaying paymaster as an enemy, and tend to act like an occupying army; they were trained by one.




Mon, 01/04/2016 - 15:21 | 6996310 Red Raspberry
Red Raspberry's picture

And also the phone tapping and internet surveillance our government uses

Mon, 01/04/2016 - 13:13 | 6995625 Chuckster
Chuckster's picture

The new king is a moron.  They been on the knife edge of a revolution for decades.  Raising prices on the citizens was really stupid.  In 2011 they borrowed billions and gave it to the citizens to try and prevent a revolution.

Mon, 01/04/2016 - 13:47 | 6995801 azusgm
azusgm's picture

They can liquidate their golden toilet seat holdings and things will be all good.

Mon, 01/04/2016 - 14:05 | 6995882 silverer
silverer's picture

I can't believe these guys got in trouble with money so fast.  All they had to do was stack all those billions, stay in the tents, and they would have been set forever.

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