Saudi energy policy ‘geared toward supporting diversification and fiscal consolidation’

JEDDAH: GCC countries are serious in negotiating an output cut coordinated between OPEC and non-OPEC countries, according to analysts from the Bank of America Merrill Lynch.
“In the case of Saudi Arabia, energy policy appears to be geared toward supporting diversification and fiscal consolidation,” they added in a report, released ahead of Wednesday’s OPEC meeting in Vienna.
“The near-term outlook for Saudi Arabia appears favorable, with a likely OPEC deal, improving domestic liquidity, lack of domestic debt issuance, repayment of government arrears and continued commitment to the dollar peg, the report added.
It said that the Cabinet’s empowerment of the Ministry of Finance to service up to SR100 billion in arrears to contractors is likely to boost spending in December and possibly in the first quarter of 2017, support deposit formation (to the extent debt is not serviced instead) and help narrow the Saibor-Libor and riyal-dollar swap spreads.
The report by Jean-Michel Saliba and the economics research team also said: “The adjustment burden of Saudi Arabia within the possible deal is key to watch to judge the sustainability of the agreement. On net, the coordinated nature of the potential cuts (which distributes the burden across several producers) could make the move revenue-positive for Saudi Arabia in the short-term.”
The researchers added: “The main current proposal to be discussed at the ministerial level on Wednesday is likely closer to the Saudi opening negotiation position, in our view.”
They also said: “We believe the gap to finalize the deal on current proposals is wider than suggested by the constructive official rhetoric. The current proposal likely amounts to a Saudi output cut of 0.5 million barrels per day, which is budget-positive.”
The economists estimate that Saudi Arabia could cut up to 0.75 million barrels per day of production while remaining marginally budget-positive or budget-neutral as the increase in the oil price will offset likely the increase in the fiscal breakeven oil price.
This would require an extra 0.25 million barrels per day cut by other Gulf countries but would accommodate an output freeze at October levels from Iraq and Iran.