Submitted by Irina Slav of OilPrice
Saudi Arabia appears to be more upbeat about the immediate future of oil prices than fundamentals warrant, according to Goldman Sachs analysts. These have calculated that the Saudi budget plan is based on a Brent average of $50 a barrel between 2020 and 2023, according to Bloomberg.
“Using our own estimates for the breakdown of government revenues, we calculate that the numbers presented in the budget statement are based on an average oil price of around $50 a barrel between 2020 and 2023,” one UK-based Goldman analyst told Bloomberg.
However, even at $50 a barrel, which is far from certain, Brent would be cheaper than Saudi Arabia needs it to be to shrink its deficit. Even the Saudis themselves have acknowledged the effect the pandemic has had on their finances. In a recent update, the governor of the Saudi Arabian Monetary Authority said the financial outlook for the year remained uncertain.
In July, the International Monetary Fund (IMF) said that the price plunge and the oil production cuts would hit oil exporters in the Middle East and North Africa hard, with the combined oil income for those countries expected to plummet by US$270 billion this year compared to 2019.
Saudi Arabia is the biggest oil economy in the Gulf and while it will not be the hardest hit, it is already being affected adversely by the combination of oil’s fundamentals and the pandemic. The Kingdom booked a deficit of $29 billion for the second quarter and effected some austerity measures although Riyadh insists this is not austerity. A tripling of VAT, a cancellation of so-called cost-of-living allowances, and the delay of some public spending decisions and the cancellation of others were among the measures.
Even so, the largest OPEC oil producer appears to believe oil prices will start improving soon, if Goldman’s calculations are right. The bank is among the oil bulls that expect prices to recover beginning next year as the supply and demand situation rebalances. However, fresh tightenings of movement restrictions in Europe last week hinted this may not come to pass. Brent closed below $40 a barrel at the end of the week and with Libya ramping up oil production with lightning speed, it may be a while before the benchmark recovers.