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As Saudi Arabia gives back perks to its people, it needs a higher oil price

Patti Domm

Saudi Arabia took steps to reverse some cutbacks on worker benefits and ministers' salaries — a move that could make the kingdom even more reliant on getting a higher price for oil, analysts said.

The move comes as oil flounders around $50 per barrel, and supplies have stubbornly held at high levels. It also suggests the kingdom may be even more eager to sign on to a new OPEC production deal to stabilize oil prices, analysts say.

Saudi Arabia over the weekend also announced some shifts in high-level positions. King Salman promoted two of his sons. Prince Khaled bin Salman was named ambassador to the U.S., and Prince Abdulaziz bin Salman was named state minister for energy affairs.

"It makes them want to have a [production] deal, and it certainly helps King Salman and the leadership ensure stability of policymaking going forward," said Michael Cohen, head of energy commodities research at Barclays. OPEC's technical committee recommended extending the deal to cut 1.8 million barrels a day at the cartel's next meeting in May, and Saudi Arabia last week indicated there is preliminary support for a deal.

Saudi Arabia said it made the decision to end the pay cuts and bring back bonuses because the government's financial position improved. But some analysts said it may have instead been to placate an unhappy public after measures that rolled back financial benefits and removed energy and utilities subsidies.

"They adjusted things; they claim they are adjusting things because the economy is in a better position, but that's nonsense," said Simon Henderson, Baker fellow at The Washington Institute and director of the Institute's Gulf and Energy Policy Program. "It sounds as though they felt it politically necessary to do something, which is economically risky. … They certainly need to adjust their budget."

Henderson said the moves also are another sign of Deputy Crown Prince Mohammed bin Salman's rising influence. Bin Salman, 31, is behind Saudi's Vision 2030 plan to diversify the kingdom away from oil, in part through the sale of a public stake in Saudi Aramco. Known as MBS, he is also second in line, after his cousin, Crown Prince Muhammed bin Nayef. But he is the king's favorite son and he has been upstaging bin Nayef, known as MBN.

"The essence of the main headline changes is it's MBS strengthening his power base and if not directly undermining certainly sidelining MBN," said Henderson. The new U.S. ambassador is bin Salman's younger brother. The new minister for energy affairs is his older half-brother.

Helima Croft, RBC global head of commodities strategy, said the resumption of benefits may be a response to unrest in the kingdom. On Sunday, the king restored allowances, financial benefits and bonuses after there were calls for protests. While there were no actual protests in the street, security forces lined the streets of central Riyadh over the weekend, according to wire reports.

Reuters reported that using the Twitter hashtag "April 21 movement," Saudis sent out statements looking for the reinstatement of benefits and an end to plans to take Saudi Aramco public as well as an end to constitutional monarchy.

"The decision to reverse the civil service salary and benefit cuts will likely have the most outsized implications for oil as it will likely necessitate higher prices in order to forestall
another blockbuster deficit," Croft said, in a note. The government announced the 20 percent cut in mister salaries and the sharp cut to civil service benefits in September.

"The benefit reduction caused considerable public consternation as two-thirds of Saudis work for the state, but when considered along with other spending cuts it contributed to an improved fiscal outlook," she added. Croft noted that the 2016 deficit was $79 billion, down from a record $97 billion the year earlier. The 2017 goal is for an ambitious $53 billion.

Croft said it will be difficult to meet these targets with oil bumping around the mid-$50s and lower.

"It will also probably undermine the Vision 2030 goal to scale back the public sector wage bill to 40 percent of spending by 2020, from 45 percent today," she added.

Henderson also said the fact that Saudi Arabia is rolling back some of the benefit cuts may slow down its efforts to diversify its economy. "Their revenues are already under pressure," he said

"They also need to keep the people happy, so they tweaked the lever the other way," said Henderson..

Saudi Arabia and OPEC agreed in December with non-OPEC producers, like Russia, to cut production by 1.8 million barrels a day in an effort to support oil prices. The agreement worked for a while, but oil ultimately fell below $50 again. Brent on Monday was just below $52 a barrel, and West Texas Intermediate crude futures were just above $49 per barrel.

"You need several weeks' worth of decent oil prices, holding in the $50s," said Henderson. "$50 is a marker in everyone's mind." Analysts say oil is beginning to rebalance but the data has not yet shown a big drop in supply.

"The fundamentals are pretty weak," said Cohen. "I don't think we're going to see it until the data helps reinforce that we're going to see it. It's not there yet. The shoulder season was always going to be weak, and we're not going to be out of it yet."

A high oil price is also seen as critical to the kingdom's plan to take Saudi Aramco public next year.

"The IPO is essentially bringing in the money to fund the changes you want to make for 2030, and so the less money there is, or the slower the money comes in, the slower you can make the investment changes to start the transformation in the economy," said Henderson.

The Wall Street Journal reported Monday that while Saudi Arabia has put a $2 trillion price on Aramco, it may not be worth what the prince has said it's worth. Sources told the Journal that the highest evaluation employees were able to come up with was about $1.5 trillion.

"I think the IPO process is going to be longer than people maybe a year ago would have suspected," said Cohen. "It plays into the idea of whether the IPO should really be thought of as something that could influence Saudi Arabia's decision-making process" tied to the OPEC production cut.

Saudi Arabia has been providing the lion's share of the cut.

"This is the trouble with being the world's largest oil exporter and the leader of OPEC. You have to take the burden," said Henderson.

Watch: Still about OPEC

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