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Record budget deficit forces Riyadh to look at non-oil revenue raising measures

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Dec 29, 2015.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    FXStreet (Mumbai) - Oil fell more than 3 per cent yesterday. Benchmark Brent was close to its 11-year lows as markets worried that there remains a strong possibility that crude prices will further fall in 2016. Global over supply is primarily to be blamed. This over supply is largely the result of OPEC’s decision to pump record volumes with the objective to defend market share and eventually drive out US shale producers. OPEC at its December 6th meeting held in Vienna chose to disregard the supply side concerns and decided to increase its collective output ceiling to 31.5 million barrels per day (bpd) from the previous 30 million.

    Brent settled down $1.27 at $36.62 a barrel yesterday, after falling to a session low of $36.52. Brent also stayed below U.S. crude's WTI futures for a fourth straight day. The United States decision to lift a 40-year ban on U.S. crude exports has helped to reduce Brent’s influence on the WTI futures. WTI finished the session down $1.29 at $36.81, following an intraday low at $36.66.

    Official data which showed a 46-year low in oil sales in Japan caused crude futures to slump in Asian trading. The New York session too saw no change in the declining trend. Traders opined that the impact of the two-day pre-Christmas rebound in prices had played itself out. U.S. gasoline futures slid more than 2 per cent while heating oil fell 1 per cent on mild weather expectations.

    Jim Ritterbusch at Chicago-based oil markets consultancy Ritterbusch & Associates feels "A bearish stance still appears warranted and we continue to view a decline to the $32.50 area”.

    Saudi Arabia feels the pinch of oil slump as budget deficit soars

    The market share strategy has helped the organisation to achieve its objective to some extent. However, it had to incur large financial loss in the process. Oil prices had fared well before OPEC’s new policy got initiated. In June 2014, the price of oil was traded at $115 per barrel. Since then oil prices fell oil more than 70 per cent. International Energy Agency said the oil price plunge since June 2014 that has reduced OPEC revenue by nearly $500 billion a year is the result of excessive pumping.

    OPEC figures show current oil glut of more than 2 million barrels per day which is equal to more than 2 per cent of world demand. Excessive productions have raised deficits in oil exporting countries and have strained their finances.

    Initially it was the less opulent members of OPEC who were suffering the brunt of OPEC’s strategy to defend market share. However, with oil prices touching multi year lows, the richer gulf nations have begun to feel the pinch. The IMF had warned in October that Riyadh will likely run out of money within five years unless it adopts drastic measures of reform. Saudi Arabia, which championed the market share strategy, ran a deficit of 367 billion riyals (€91 billion billion) or 15 per cent of GDP in 2015. The riyal dropped in the forwards market to its lowest since 1999 following a sharp increase in budget deficit. The riyal suffered on fears that Riyadh may have to abandon its peg to the US dollar.

    Saudi Arabia has thus been compelled to lower its state budget deficit by introducing spending cuts. Also, Riyadh is looking at non-oil revenue raising methods including tax and privatisation. Saudi Arabia’s finance ministry released the 2016 budget yesterday. The world’s top crude exporter had no option but to adopt politically sensitive reform measures previously avoided by authorities. “Our economy has the potential to meet challenges,” King Salman said in a speech, adding the 2016 budget launched a phase in which his kingdom would diversify its revenues.

    Saudi Arabia aims to slash the budget deficit to 326 billion riyals. Riyadh plans to reduce the pressure that it currently faces by liquidating assets held abroad and issuing bonds. Budget projects spending in 2016 has been brought down to 840 billion riyals, from 975 billion riyals actually spent in 2015. the confidence of financial markets in Riyadh will depend on the extent to which it manages to stick to its proposed measures.

    It is evident from these measures that Riyadh is not hoping to see any recovery in oil price any time soon. It is instead seen preparing itself to survive multi-year period of cheap oil.
    For more information, read our latest forex news.

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