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Thursday, 20 October 2016

The World’s Biggest Oil Kingdom Reverses Course - Bloomberg

The World’s Biggest Oil Kingdom Reverses Course - Bloomberg:

"Next year will be a test of strength for Saudi Arabia, the world’s largest oil exporter, as it tries to regain control of the market and lift prices. After two years of pumping at full blast, and helping drive prices to 12-year lows in January, the Saudis now appear willing to pull back. In September, at a meeting in Algiers, the Organization of the Petroleum Exporting Countries agreed to the outlines of a plan to lower the group’s production by as much as 750,000 barrels a day. Although the details won’t be final until the cartel’s Nov. 30 meeting in Vienna, the Saudis are expected to make most of those supply cuts.

The retreat signals an end to the kingdom’s foray into free-market economics. Two years ago, with prices already falling in response to a growing supply glut, Saudi Arabia, against the wishes of its fellow OPEC members, refused to lower output. The move was a direct challenge to other oil producers. By flooding the world with its low-cost crude, the Saudis bet that they could withstand lower prices longer than other countries and oil companies and force them out of the market. The strategy worked to a degree. The Saudis are pumping and selling record amounts of oil. Output hit almost 10.7 million barrels a day in July. At the same time, other producers have had to cut back: U.S. shale production has fallen, and non-OPEC oil supplies are set to drop in 2016 by the largest amount in 30 years.

In April 2016 the powerful deputy crown prince, Mohammed bin Salman, said the kingdom no longer cared whether oil cost $60 or $20 a barrel. Rather than keeping prices high, the Saudis seemed resigned to cheap oil and made plans to use that revenue to fund other investments in a bid to diversify the kingdom’s economy and reduce its reliance on crude. But the economic consequences of cheap oil have been severe for Saudi Arabia. Riyadh is burning through foreign-exchange reserves, government contractors have gone unpaid, and civil servants, who make up two-thirds of the labor force, will get no bonus this year. The country’s fiscal deficit is more than 10 percent of gross domestic product, the highest ratio of any Group of 20 nation. The International Monetary Fund forecasts that Saudi economic growth will slow to about 1 percent next year, the worst since 2009. A few banks predict a recession."

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