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 The OPEC heavyweight shows no signs of wavering in the long-term oil
strategy it has orchestrated since last year. Instead, it appears
willing to continue tolerating cheap crude to defend market share
and wait for the market to balance without cutting supplies, oil
sources and analysts say.
In one of the strongest signals that the kingdom will stay the
course despite the impact on its finances, Saudi Aramco's chairman
Khalid al-Falih said it could outlast others.
"We see the market balancing sometime in 2016, we see demand
ultimately exceeding supply and soaking up a lot of the excess
inventory and prices in due course will respond regardless of when
and by how much," Falih told a news conference late on Monday
detailing next year's budget.
"Saudi Arabia more than anyone else has the capacity to wait out the
market until this balancing takes place," he said.
Analysts said the plans announced on Monday to shrink a record state
budget deficit with spending cuts, reforms to energy subsidies and a
drive to raise revenues from taxes and privatization showed Riyadh
was expecting lower revenues.
"We don't see any changes to Saudi Arabia's oil policy - in the
context of oil production," said Amrita Sen, chief oil analyst at
consultancy Energy Aspects.
"The budget changes suggest they are expecting oil prices to stay
low for some time and the reforms are a small step toward addressing
that."
BELT-TIGHTENING
The 2016 budget and reforms announcements marked the biggest
shake-up to economic policy in the kingdom for over a decade and
aimed to cut the government deficit to 326 billion riyals, down from
367 billion riyals or 15 percent of gross domestic product in 2015.
Next year's budget projects spending of 840 billion riyals, down
from 975 billion riyals spent in 2015.
The government also said it was hiking prices for fuels, water and
electricity as well as gas feedstock used by industry, as part of
politically sensitive subsidy reforms.
"Saudi Arabia can either spend its way out of the current scenario
or start belt-tightening. In the past the country has spent lavishly
on health, education and infrastructure in difficult times knowing
that oil prices will be supportive," said Asim Bakhtiar, head of
research and investment advisory, Saudi Fransi Capital.
"If oil has entered a down cycle then belt-tightening will prevail."
Falih, who is also the health minister, became chairman of Aramco,
the world's biggest state energy firm, earlier this year after more
than 30 years in the company.
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As one of one of a handful of Saudi figures whose views are closely
watched by traders and analysts for any insight into the kingdom's
oil thinking, Falih has long been considered a possible successor to
Saudi Oil Minister Ali al-Naimi.
His appearance at the news conference with two other ministers,
during which he shared his views on oil prices and market
assessment, was seen as a possible signal he could be named oil
minister when Naimi, 80, eventually retires.
The Organization of the Petroleum Exporting Countries (OPEC)rolled
over its year-long strategy of pumping at will in its Dec. 4
meeting, raising the stakes in its survival-of-the-fittest market
strategy.
Riyadh was the driving force behind OPEC's shift in policy last
year, rejecting calls to reduce output to support oil prices that
are trading this month at their lowest since 2004. It chose instead
to defend market share against higher-cost-rivals.
Falih said the policy had borne fruit.
"Over the last year we have seen the down cycle in the oil markets
have a significant impact on both supply and demand. Supply has
plateaued in North America and started declining by significant
amounts and we expect that to continue or perhaps accelerate in
2016," he said.
Brent was trading at around $36.85 a barrel on Tuesday, a sharp drop
from a high of $115 a barrel in June 2014 before OPEC's policy
shift.
The Finance Ministry did not disclose the average oil price assumed
in its 2016 budget calculations but economists estimated it was
about $40 a barrel and saw crude production remaining high at above
10 million barrels per day next year.
"We do not see Saudi Arabia... cutting production in order to
support upward movement in prices. So far, Saudi policy of gaining
market share has worked, with lower prices undercutting both OPEC
and non -OPEC competitors in key markets," wrote analysts at Jadwa
Investment, a leading Saudi financial firm, in a note on Tuesday.
(Additional reporting by Reem Shamseddine; editing by Philippa
Fletcher)
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