A year ago at this time, West Texas Intermediate (WTI) was trading in the low $50s per barrel after having fallen by 50% during the prior six months. The shock of Saudi Arabia yielding its oil pricing control to market forces was just sinking in. Now, WTI is in the mid-$30s a barrel, down 30% in 2015, with fear that prices may be heading even lower.
Almost every oil price forecast calls for further demand weakness as El Niño brings unseasonably warm weather to the East and Midwest regions of the country. With a bleak outlook for 2016 commodity prices, all eyes are on Saudi Arabia in hopes that the Kingdom will give up its fight against America’s shale producers and Canada’s oil sands miners, thereby boosting global oil prices. This scenario would restore profitability to the oil industry, and aid those OPEC members desperate for higher prices to bail out their government budgets.
Is this merely wishful thinking? Two events during the past week would suggest not.
First, Saudi Arabia announced its budget for 2016. After posting a loss of $98 billion last year, the government expects to lose only $87 billion this year because it has cut social benefits and raised fuel, electricity, and water prices along with the cost of plane tickets and cigarettes. Depending on the octane level, gasoline pump prices in the Kingdom were raised between 50 and 67%. High octane gasoline (95) now costs $0.24 per liter, or $0.91 per gallon. Even though fuel prices remain among the lowest in the world, raising pump prices isn’t making the populace happy.
Saudi Arabia expects to sell about the same amount of oil this year as last and at an implied price in the mid $40s per barrel, which suggests not much improvement for the oil business. Additionally, the country plans to boost its non-oil revenue income from 29 to 40% of government receipts, which is significant since historically this category has represented only about 10% of income.
Second, in the political arena, the Saudi government executed 47 jihadists over the weekend, including an influential Saudi national and Shiite figure in the kingdom, Sheikh Nimr al-Nimr. The executions were meant to send a message to the rest of the Middle East about the country’s determination to stay the course in its ongoing battles with Iran and Iranian-sponsored terrorism. Sheikh Nimr was a leading opposition figure during the government’s efforts to thwart the 2011 Arab Spring movement that spurred anti-regime activity in the country’s Eastern Province, the heart of the Saudi Arabian petroleum industry. The timing of his execution signaled that the broader war with Shiites, such as the Iranian-sponsored terrorists in Yemen and those fighting in Syria and Iraq, will continue.
While the western world will see each event independently, the combination of these actions by Saudi Arabia’s King Salman and his untested princely leaders may increase the internal strife that could lead to civil chaos throughout the Kingdom, or even a leadership coup. If turmoil occurs, look for oil prices to react as Saudi Arabian output is likely to drop. The current darkness surrounding the oil business would disappear, shifting quickly to panic as U.S. production will need to grow, and grow fast!
