With Oil Prices Dropping Steadily... Will Saudi Arabia, with a 'Fiscal Surplus,' Implement Additional Production Cuts?

[Asia Economy Reporter Jeong Hyeon-jin] As international oil prices fall to around $70 per barrel, the market is focusing on whether Saudi Arabia will implement additional production cuts. Analysts suggest that, as Saudi Arabia is expected to record a fiscal surplus for the first time in nine years this year and may aim for a surplus next year or consider funding for Neom City, it is highly likely that they will try to maintain oil prices at a certain level.

[Image source=AP Yonhap News]

According to CNBC and others, on the 8th (local time) at the New York Mercantile Exchange, the price of West Texas Intermediate (WTI) crude oil for January delivery next year closed at $71.46 per barrel, down 0.76% from the previous session. This closing price is the lowest since December 21 of last year. WTI has fallen for five consecutive trading days recently, with the decline during this period being the largest since early April. North Sea Brent crude also fell 1.3% to $76.15, barely holding above the $70 mark.

Oil prices fell that day due to concerns over weak demand following the announcement of weekly crude oil inventory data showing increases in gasoline and diesel stocks. The outlook is bleak amid combined factors such as China's easing of zero-COVID measures and the price cap on Russian crude oil, which have raised concerns about weak demand.

However, Saudi Arabia's fiscal situation has emerged as a variable. There is speculation that if oil prices fall below $70 per barrel to achieve a surplus next year as well as this year, Saudi Arabia may implement additional production cuts.

The Saudi Ministry of Finance announced the day before that it expects a fiscal surplus of 102 billion riyals (approximately 35.7 trillion won) this year. This is an upward revision from the initially projected surplus of 90 billion riyals, amounting to about 2.6% of the total gross domestic product (GDP). The Saudi government’s total fiscal revenue this year is estimated at 1.234 trillion riyals, with expenditures at 1.132 trillion riyals.

The surge in oil prices to nearly $130 per barrel throughout the year has been the driving force behind the surplus. The Saudi Ministry of Finance forecasts a fiscal surplus of 16 billion riyals next year, double the initial estimate. Considering this, current oil prices need to bottom out and rise.

CNBC reported that economists expect Saudi Arabia to maintain oil prices at around $75 to $80 per barrel to balance its fiscal budget. The International Monetary Fund (IMF) estimated that Saudi Arabia needs oil prices of $73.3 per barrel this year and $66.8 per barrel next year to achieve fiscal balance. Meanwhile, Goldman Sachs predicted in a report that if the average oil price next year is around $90 per barrel, Saudi Arabia will record a fiscal deficit equivalent to 0.7% of GDP.

In particular, Saudi Arabia has recently accelerated large-scale projects such as Neom City. The massive budget requirements mean that a decline in oil prices will inevitably increase fiscal burdens. The Wall Street Journal (WSJ) explained, "High oil prices are strengthening Crown Prince Mohammed bin Salman's economic plans."

Earlier, OPEC and non-OPEC major oil-producing countries including Russia, collectively known as ‘OPEC+’, decided on the 4th to maintain a production cut of 2 million barrels per day. OPEC+ had agreed on this policy in October. OPEC+ stated, "We will continue to monitor the oil market and respond immediately if necessary to maintain supply-demand balance and price stability."