Market Focus: Is Saudi Arabia’s “oil put” strategy reasonable ?
Alexandre Kateb was interviewed on RT International about Saudi Arabia’s “oil put” strategy following the Kingdom’s decision to flood the market with cheap oil in order to squeeze the other major oil producers.
The decision to flood the market with cheap oil will have a detrimental impact on the Kingdom’s public finances and current account. The country is already running a budget deficit above 5% of GDP. Therefore this strategy cannot be sustained for a long time, especially taking into account the growing imbalance between supply and demand on the oil market and the ensuing downward pressures on oil prices that this “oil put” strategy will inevitably reinforce.
Saudi Arabia is embarked on a major transformation programme called “Vision 2030”. The Saudi government needs all the resources it can find to implement this programme if it wants to keep its credibility – both domestically and abroad – and diversify the country’s oil-driven economy.
Russia has more flexibility to cushion the blow in the short term as it can action more policy levers. Its oil fiscal breakeven is at 40$ per barrel against 80$ per barrel for Saudi Arabia.
The Saudi move appears to be a rather harsh strategy to bring back Russia to the negotiation table. However, the odds of reaching an agreement that could somehow support prices and keep them in a reasonable range is questionable.