Saudi Arabia Can't Afford To Have Oil Prices This Low For Very Long
REUTERS/Heinz-Peter Bader Saudi Arabia's Oil Minister Ali al-Naimi. Saudi Arabia is playing it close to the chest.
In a new note, RBC Capital Markets analyst Helima Croft takes a look at both the fiscal and external breakeven crude-oil prices for countries across the Middle East.
Fiscal breakeven is the price required for countries to balance their budgets, while the external price is what is needed for a country to balance trade.
OPEC's Thanksgiving decision to keep production unchanged put pressure on some of OPEC's more cash-strapped members like Venezuela, but Croft notes that Saudi Arabia, seen as OPEC's most powerful member, is still facing substantial spending commitments, largely related to an increase in defense spending since 2011.
Croft evaluates breakeven prices assuming Brent crude is around $70 a barrel. On Thursday, Brent crude was trading closer to $60.
But either way, Saudi Arabia is well below its fiscal breakeven price of closer to $100 a barrel, and Croft adds that if prices persist at roughly $25 below Saudi Arabia's breakeven price, its government reserves could be depleted by 2018.
Amid the decline in oil prices, many have speculated that OPEC — in this case, operating as a proxy for Saudi Arabia — is looking to force US shale producers out of the market.
But this strategy might not all it's cracked up to be.
As Croft writes, "A policy of trying to permanently price out US shale could prove to be something of a mutually assured destruction strategy."
RBC Capital Markets
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