Saudis Predict Higher Oil Prices - but Dallas Fed Suggests Their Hopes May be Unfounded

OPEC's efforts to bring about rebalance are far less effective than reported, the bank says. File Image / Pixabay

Saudi Arabia, the de facto leader of the Organization of the Petroleum Exporting Countries (OPEC) and the driving force behind the cartel's recently agreed-upon crude cutback extension, believes oil prices will climb 12 percent in 2018 as long as it continues to comply with the cuts.

But while the kingdom needs higher prices to help bolster the value of the Initial Public Offering of state-run Saudi Aramco, the Federal Reserve Bank of Dallas argues that OPEC's efforts to stabilize the market overall have been far less effective than boosters  think.

The Saudi finance ministry on Tuesday said in a budget statement that it expects to collect 492 billion riyals ($131 billion) from oil sales in 2018, compared with 440 billion riyals this year; it also forecast that non-oil revenue will climb to 291 billion riyals from 256 billion riyals in 2017.

One sign that domestic prices are heading upwards is that the Saudis will be raising domestic gasoline prices by about 80 percent next month, a source told Bloomberg.

Ziad Daoud, chief Middle East economist for Bloomberg Economics, said, "Assuming Saudi Arabia will continue to comply with the OPEC production cuts throughout 2018, the budgeted increase in oil revenue reflects an expectation of higher export prices," and he added that higher exports or an increase in oil prices can help to balance the budget.

Iraq, Qatar, and Iran are also anticipating higher prices: Iraq is assuming $46 per barrel for its 2018 budget, up from $42 this year; Qatar's budget for the new year assumes $45 per barrel, while Iran is forecasting $50 per barrel (which would earn the Islamic republic $33 billion in sales).

But at least a good portion of these countries' hopes seem to hinge on the effectiveness of the cutbacks to bolster prices over the long run, and the Dallas Fed in a new report argued that although OPEC's production cuts seem to have reduced oil inventories in developed nations to half of their level above the five-year average, much of that decline came because the five-year average has drifted higher.

It stated, "Only half of this decline represents actual inventory draws; the new five-year average includes 2017 inventory data and is therefore higher."

Specifically, in 2016 the five year average of crude inventories was around 2.75 billion barrels, but this year it increased to 2.85 billion barrels; at the same time, those stockpiles fell by 100 million barrels over the past year to about 2.95 billion barrels.

The Chron website notes that "It also seems that this stored oil hasn't disappeared: Chinese inventories, excluded from calculations of OECD stockpiles, have grown by 200 million barrels over the past year."

It's also hard to imagine prices rising much further than their current range-bound state, considering the overwhelming signs that oil production in 2018 will rise in the U.S. and that OPEC members such as Libya and Nigeria are already making noises about boosting, not reducing, their output.