Business & Money | Thursday 9 April, 2015 3:54 pm |

The widening of global oil surplus to 2 million barrels per day (mbpd) led to Brent prices dropping by 29 percent, quarter-on- quarter, to $54 per barrel in Q1 2015. Oil markets will continue to see large surpluses in Q2 & Q3 2015. That’s with regard to oil prices. In addition, slower shale oil growth and improved global economic growth will result in a more sustained rise in price in the last quarter of 2015. We see full year Brent crude now averaging $61 per barrel, down from $79 per barrel. According to the latest Quarterly Oil Market Review released by Jadwa Investment, a leading Saudi Arabian private equity house and investment bank headquartered in Riyadh.
Furthermore, Saudi crude continues to face intense competition in key foreign markets which will keep exports at similar levels to last year, at around 7 mbpd. This combined with higher domestic consumption means we now project Saudi production rising to 9.8 mbpd in 2015, up from 9.6 mbpd in our previous forecast.
Yemini crisis has had an impact as Brent spiked to $60 per barrel during March after Arab coalition forces intervened in the Yemeni civil war. Although Yemen’s importance as an oil producer is limited, there are wider repercussions for the global oil market if the conflict seriously deteriorates. Currently there are no reports of disruption to Yemeni supply and no threats to supplies through the Bab al-Mandeb Strait.
Moreover, the potential lifting of some of the sanctions related to Iran in June is not expected to add significant amounts of crude to oil markets in 2015. In the recent past the Iranian government has said that it can add 800 tbpd of production within a few months of sanctions being lifted. In practice the lifting of sanctions is not expected to happen very quickly.
Similarly, market drivers have played a role in the downward adjustment in the oil price. It was due to the several factors. One factor is the rising commercial crude stockpiles. OECD commercial crude stocks are at record levels. The majority of crude stockpiling has come about in the US, from a combination of continued rises in US shale output and an embargo on crude oil exports .The implications of such a large commercial stockpile is that oil prices will not be supported as soon as demand picks up. Rather stocks are likely to be drawn down initially, thereby limiting the need for additional oil production.
Another factor is the persistence of a strong dollar. The dollar rallied to 12 year highs in Q1 2015, which has contributed to downward pressure on oil prices.
The third factor is the US shale oil resilience. Shale oil producers are cutting back capital expenditure as a result of being hit by lower prices. However, according to the EIA, even with capex cuts the five largest shale plays have seen production per rig rise by 22 percent in Q1 2015, year-on-year.
Furthermore, record oil surpluses until Q4 2015 is considered another factor. The combination of higher oil demand growth and slower year-on-year growth in non-OPEC output will push global oil balances from a large surplus to a much smaller surplus by the end of 2015.
With the above upward revision to Saudi crude oil output, the Saudi economic outlook is clearer. We have revised our forecast for 2015 GDP growth upwards from 2.5 percent to 3.3 percent year-on-year. Our 2015 annual forecast for oil sector growth is now 1.6 percent, up from our previous forecast of –0.6 percent.
While we expect the government to maintain its expansionary fiscal strategy, the net effect of lower oil prices and higher oil output is a deeper deficit on the fiscal budget. The current account is also heading for its first deficit since 1998, although it is expected to be small, at $23.1 billion, or 3.4 percent of GDP. Despite the prospect of recording twin deficits in 2015, large foreign reserves of SR 2.7 trillion ($714 billion) held by SAMA, as the end of February 2015, should provide enough confidence for the government to sustain an elevated level of spending during 2015 and beyond.
As for Saudi government financing and with contrary to our earlier forecast, the government is expected to start issuing debt as part of its deficit financing strategy. We forecast public debt increasing to 9.6 percent of GDP by the end of this year, compared to a global rule of thumb of 40 percent as the government shifts its financing strategy from using foreign reserves to raising debt to finance its deficit.
The timing of this issuance is ideal given the Kingdom’s record low debt level (1.6 percent of GDP) and ample reserves (97 percent of GDP), as well as the current low interest rate/high liquidity environment. The new financing strategy will reduce the pressure on foreign reserves as the main deficit financing tool, and will in turn make debt issuance a comfortable financing alternative to sustain an expansionary fiscal policy. Debt issuance will also effectively contribute towards the development of the debt capital market in the Kingdom.