EMEA News
Analysts Believe $50 Oil Is the New Norm - Which Could Spell Economic Trouble for Saudi Arabia
Saudi Arabia may be headed for tough times if two separate analyses proves to be true: the International Monetary Fund said in a report that the kingdom will require a crude price of at least $70 per barrel in 2018, compared with an average $52.4 for Brent achieved so far this year, if it is to avoid falling back on its dwindling foreign currency reserves.
However, Goolam Ballim, chief economist and global head of research for Standard Bank Group, told Bloomberg that,"It is a new epoch, it is likely that oil prices are not going to rekindle the high digits that we were familiar with several years ago, and in the order of $50 per barrel is what countries like Saudi Arabia, Nigeria, Angola, Algeria are going to have to condition themselves with."
Brian Gilvary, chief financial officer of BP, leans towards the same outlook: he told Reuters that he didn't expect oil prices to remain at their current level of above $60, and that "By the end of next year we will be back at a more normal stock level; it will continue to be bumpy into next year, and I wouldn't be assuming those levels of prices for next year.
"I think $50-$55 is a pretty good working assumption for next year," and he added that his company will be able to generate a profit under those conditions, even perhaps if oil dips to $45.
The IMF's assessment of Saudi Arabia's economic needs also shows the kingdom has fallen further behind its neighbours in adjusting their economies for lower oil prices and becoming more efficient; in fact, five out of seven Middle Eastern countries are said to require only $61 per barrel crude to break even fiscally.
But Ellen Wald, an energy historian, says the IMF analysis is faulty: writing in Forces, she argues that Saudi Arabia "has typically employed a strategy of seeking an equilibrium oil price instead of a simply high price, looking to establish a situation that was good for both consumers and producers."
She went on to note that running a deficit is a deliberate Saudi strategy designed to build infrastructure and provide services, on the grounds that oil revenues will eventually rise; she also pointed out that the country has no problem finding parties to finance debt.
Moreover, the IMF may not have even taken into account a change in tax rates, which makes the break even number "quite low and even lower," according to Wald.
Few if any analysts think the current crude prices will last much longer, for simple reasons: last week Katie Nixon, CIO of Northern Trust, remarked, "We've got incredible demand...and we've got some supply constraints....[but] don't disregard the fact that supply is going to come back to the market: U.S. shale producers are very flexible and very willing to come in at these prices."
