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Analysis: Saudi Arabia needs $70/b oil next year to breakeven

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Fiscal squeeze highlights pressure for cuts

Mid East OPEC peers have lower breakevens

London — Saudi Arabia will have to engineer a 34% increase in average oil prices next year if it is to balance its budget and avoid falling back on its dwindling foreign currency reserves, International Monetary Fund data showed Tuesday.

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The Washington-based IMF said in a report that Saudi Arabia, OPEC's biggest oil producer, would require a crude price of at least $70/b in 2018, compared with an average $52.4/b for Dated Brent achieved so far this year, if it is to avoid a further drain on its fiscal accounts.

Watch Andy Critchlow's related video interview with CNBC Arabia (Nov 1, 2017)
Note: Arabic language only

The data highlights the pressure Saudi Arabia is under when compared with its peers to extend OPEC's current production-cut deal despite two years of deep spending cuts and austerity measures.

Riyadh also requires higher prices to bolster the valuation of state Saudi Aramco ahead of an initial public offering or private placement expected by the end of 2018.

Riyadh hopes the sale of a 5% stake in the company will raise $100 billion for the public finances, valuing the producer at $2 trillion.

"Whatever schism was there previously is still there now, especially with an IPO," said Gary Ross, executive chairman and head of global oil at PIRA Energy, a division of S&P Global Platts. "The Saudis will want higher prices than UAE/Kuwait."

A Platts analysis of the IMF's "Regional Economic Outlook for the Middle East and Central Asia" also shows Saudi Arabia has fallen further behind its regional neighbors in the race to adjust their economies for lower oil prices and become more efficient.

Five out of the seven other Middle East countries in OPEC surveyed by the IMF require average prices below the current $61 level, while the fiscal breakeven gap with Saudi Arabia could widen to $12.50/b next year from $10.40/b in 2016.

OPEC fiscal breakeven oil prices in Middle East


Saudi Arabia is eager to extend its current pact with OPEC, due to expire in March 2018. Last week, Crown Prince Mohammed bin Salman, publicly backed maintaining the agreement, saying it was in everyone's interest to do so.

Prince Mohammed, who controls oil policy in the country, is also championing a dramatic reboot of the Saudi economy to diversify away from crude. But his reforms may require OPEC to continue reining in supply.

The current deal calls on it and 10 non-OPEC producers led by Russia to cut a combined 1.8 million b/d, in a bid to draw down global stockpiles and rebalance the market.

However, progress has been slow, with average Dated Brent prices assessed by Platts only just returning to their 2015 levels of around $52/b.

Brent crude futures reached two-year highs this week amid growing talk of OPEC extending its cuts. It settled Tuesday in London above $61/b.

The rebound is also raising concerns that some producers in OPEC will allow their compliance to slip in order to generate higher government revenues.

That could put more pressure on Saudi Arabia , which is already making the biggest contribution to production cuts from its near-12.5 million b/d of total capacity.

Saudi Arabia's total reserves including gold in its vaults had dropped by 26% to $547 billion at the end of 2016 from their peak two years earlier, according to World Bank data.

--Eklavya Gupte,
--Paul Hickin,