Commentary: Reading tea leaves of Saudi 2015 budget

Oil producers and traders alike are desperately looking for a sign that the current oil price slide is about to bottom out but a rebel attack on a Libyan oil field failed to fit the bill.

This week, traders might be tempted to focus on the fact that Saudi Arabia’s 2015 annual budget would need an average of $80 oil for the year to balance its books as a sign that the kingdom thinks prices will rebound soon. But the kingdom has historically missed the mark between budget making and actual oil prices.

Famously, in 1998, the last time Saudi Arabia embarked on an earnest price war to defend its market share in the face of the Asian financial crisis, the kingdom ran budget deficits for over two years while it waited for other oil producers to blink first. In a recent blog post, Washington-based analyst Jareer Elass explains that the kingdom could easily weather a deficit next year, estimated at about $38.6 billion by some calculations. In 2014, the Saudis ran a budget deficit of about $14.4 billion.

Commentators are all over the map analyzing a variety of statements by Saudi Oil minister Ali Al-Naimi but when it comes to an ultimate floor price for 2015, perhaps the reality is that all OPEC members, including Saudi Arabia itself, may be overly optimistic about the factors that would cause the market to rebound to an average of $80 a barrel, barring a sudden unplanned supply disruption. Minister Al-Naimi conceded as much in a recent interview “…it is not in the interests of OPEC producers to cut their production, whatever the price is. Whether it goes down to $20, $40, $50, $60, it is irrelevant.”

Given the various sources of global instability, cybercrime and the cloudy outlook for important economies such as Russia and China, it is hard to imagine how low oil prices could quickly stimulate a strong global economic recovery in just one year. And if it did, would oil demand immediately rise? New advanced automotive technologies and other efficiency gains are making many economies less oil intensive. That might mean that a rebound in oil demand might be slow in coming, unlike in 1999 or 2009.

Moreover, it is unclear whether the current drop in oil prices would be enough to shut in sufficient marginal oil production this year to justify a strong price recovery given the level of current overproduction. If anything, a mild winter might make the supply-demand imbalance in oil and gas markets worse, not better over time.

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