Retrieved From: Lexis Nexis, link here.
Date: October 20, 2008
Title: Saudis Could Withstand $30/Barrel Oil: Report
Byline: Kate Dourian
Section: Pg. 1 Vol. 86 No. 203
Length: 835 words
Link to relevant WorldOilNews blog posting here.
Dubai
Oil giant Saudi Arabia can withstand a fall in oil prices to $30/barrel and other Gulf oil producers, while needing a higher price threshold, are also well placed to weather the sharp slide in oil prices, Merrill Lynch said in its quarterly report on the region.
"In a scenario of falling oil prices, it is helpful to look into breakeven oil prices," the financial services and investment banking group said in its report issued this month.
Merrill Lynch noted that when it published its last quarterly report, oil prices were $135/b, allowing the Gulf Cooperation Countries—Saudi Arabia, Kuwait, the UAE, Qatar, Bahrain and Oman—to achieve a current account surplus of $1 billion/day.
"Now the hot topic is precisely the opposite: what would happen if oil prices were to go all the way down to $50/b? Despite the sharp change in oil prices, the fundamental answer remains the same. GCC countries have saved 70% of their windfall over the last five years for rainy days, and it's torrentially downpouring these days," it said in the report.
The report said the lowest breakeven oil price that would bring 2008-2009 budgets into balance is in Saudi Arabia ($30/b), followed by the UAE ($40) and Qatar ($55). "Therefore, that means that Saudi Arabia can maintain the current level of budget spending even if the oil price were to fall to $30/b," it said.
The highest breakeven number is $75/b for Kuwait, due to a one-off budget transfer of around $20 billion to capitalize the social security system, it said.
The average breakeven price for the GCC countries is $50/b. Four of the GCC member states, except Oman and Bahrain, are members of OPEC. With Iran, the Gulf oil producers hold roughly 60% of global crude reserves.
Recent analyses on the impact of the current global financial crisis have suggested that Gulf states, which benefited from soaring oil prices, achieving record budget surpluses as a result, are better placed to weather the storm. However Merrill Lynch and others have reduced their growth forecast for the Gulf states, where regional stock markets have mirrored the meltdown in global equities values.
Merrill Lynch cut its 2009 forecast for GCC growth to 4.5% from 6.2% due to the weakening economic backdrop and lower oil prices.
Standard & Poor's, part of the McGraw- Hill Companies, said in a recent report that by opening up to world markets in recent years, the GCC countries were more vulnerable to financial turbulence abroad.
"In an environment where soaring oil prices have led to the massive accumulation of surplus cash for the oil-producing GCC countries, it might have appeared earlier in the year that the global credit crunch would simply pass them by. But recent events have shown that as these economies have opened up to the rest of the world in recent years, so too have their vulnerabilities to global economic conditions," S&P said in report published this month focusing on the UAE.
Washington-based PFC Energy, in a report looking ahead to the extraordinary OPEC meeting due to be held on October 24, recalled the oil price collapse of the late 1980s, when OPEC increased production just before the Asian financial crisis and sent prices crashing down to $9/b.
OPEC, in calling the meeting, is signaling it wants to avoid past mistakes, PFC said. "The precipitous fall in crude oil—and calls from technical analysts and some banks that $60/b or even $50/b oil is the likely short-term target—no doubt raises anxieties among the group, but it is unlikely that OPEC has in mind a specific short-term price target it is looking to defend," PFC said.
Even Venezuelan President Hugo Chavez has in recent days been warning that lower oil prices are here to stay—and has started preparing his constituency for potential cuts in government spending as a result, it said.
"The key OPEC power, Saudi Arabia, furthermore will be hesitant to support a high price strategy at this point. Not only will Riyadh be unwilling to see inflationary fears brought on by higher oil derail key consuming countries' efforts to stimulate their own sagging economies, but from a political standpoint the Saudis will not want expansionary fiscal policies being portrayed as simply lining OPEC coffers," PFC said.
"At the same time, Saudi Arabia would reject calls that a lower oil price is needed in order to stimulate the global economy, creating a somewhat narrow path to navigate," it said.
OPEC is likely instead to focus on keeping commercial oil storage at or above the five-year average to ensure that refiners have adequate crude and thereby deflect calls for higher output, the report said.
Such a strategy would lead to a "softer price environment" while avoiding the calamitous collapse as witnessed during the Asian financial crisis, when a fight for market share between Saudi Arabia and Venezuela led to the creation of a massive crude overhang, PFC said. It noted it recently had revised downward its 2009 oil price forecast to $85/b from $105/b to reflect this new environment.
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