Budget pressure likely to keep Saudis propping up oil prices

Pressure on Saudi Arabia’s finances will make it eager to secure a deal on oil output cuts at this week’s talks among global producers, even if Riyadh has to shoulder the lion’s share of the reductions. With benchmark Brent crude at $51 a barrel, Saudi energy minister Khalid Al Falih has said he wants current output cuts to be extended by nine months to next March.

Since last year Riyadh has averted financial crisis partly by borrowing abroad. Foreign investors are happy to lend it tens of billions of dollars, but that does not mean the government, which came close to eradicating its debt three years ago, is happy with the process. Growth in Saudi Arabia’s non-oil economy, meanwhile, has almost ground to a halt, increasing pressure on the government to stimulate activity and rein in unpopular austerity policies.

Monica Malik, chief economist at Abu Dhabi Commercial Bank estimates that a $1 increase in average oil prices over a year reduces the Saudi budget deficit by 0.3-0.4 percentage points if spending remains steady, making a price increase of even a few dollars attractive to the Saudis.

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