Trimming the fat: Low oil prices squeeze Saudi Arabia budget

Contrary to the belief at the beginning of the price war in late November 2014, that Saudi Arabia could outlast all other producers because of its ability to produce oil at the lowest cost, the International Monetary Fund warned Riyadh in October it would run out of money within five years if it did not tighten its belt. Today, the futures price on the USA benchmark reversed course; it is down more than 1% to $36.62 per barrel in recent trading.

It is no secret that the Canadian dollar remains intimately tied to the movements in the oil price markets.

Moreover, the Saudi-Iran conflict could merely play out in the oil markets. The country plans to double their output to a million barrels per day after sanctions are lifted, according to Reuters.

With an expected build in inventory in the first half of 2016, the risk of continued sluggish demand growth will weigh on the market. In comparison, Brent’s first-line futures prices fell 1.6% to $37.28 per barrel in the week ended January 1 from $37.89 at the end of the previous week.

Early on Sunday, Iranian protesters stormed Saudi Arabia’s embassy in Tehran while protesting the execution of the Shia Muslim cleric Sheikh Nimr al-Nimr, convicted of terror-related offenses. The clash between the two Middle Eastern rivals also comes as Iran hopes to ramp up oil exports following the expected removal of sanctions against it after reaching a deal over its alleged nuclear weapons development program.

The price of oil, Saudi Arabia’s most important export, has tumbled this year because of reduced global demand and fierce competition by producers – including the Saudis – to keep their share of the market.

On one side is a slowing demand for oil, especially in China. Furthermore, within each of those 4 scenarios for each of the 3 varied oil price situations, the graphic is further divided into how long their reserves would last if their reserves is all they use for funding, and how long their reserves would last if they financed 50% of their operations by issuing debt instruments. Dubai crude, as quoted by price-reporting agency Platts, averaged $34.591 a barrel for December, the lowest since December 2004 as Middle East suppliers offered discounts in a battle for Asian market share.

Saudi Arabia is the country that actually has gained an ever more influential position within OPEC for the past 35 years, since the Islamic Revolution in Iran, which forced global sanctions on the Persian country. “So far, they’ve been going along with it, but this renewed political vigor may prompt them to change a bit”, CMC Markets analyst Jasper Lawler said.

Jason Sedawie, of Decisive Asset Management who invests in several U.S. retailers, points out that declining oil prices “are helping the consumer to catch up deferred home and vehicle expenses but they have pulled back on smaller purchases”. Saudi allies in the Persian Gulf also downgraded diplomatic relations with Iran.

Brent crude slid 34 percent over the past year as the Organization of Petroleum Exporting Countries increased its output in the face of already rising global stockpiles.