Saudi oil cut extended as it posts budget deficit

Reuters/Leonhard Foeger

• Analysts declare kingdom in technical recession
• Government has turned to debt issuance to finance deficit
• Ministry source: ‘cut can be extended’

Saudi Arabia will extend a one million barrel per day voluntary crude oil output cut into September, as fears of a global economic slowdown continue to weigh on demand. 

The decision was made as the kingdom announced a budget deficit for the second quarter of the year.

Negative GDP growth led to analysts declaring that the Gulf state was in a technical recession.

The price of Brent crude rose from $82.46 per barrel to $83.63 as traders factored in the reduced output. 

• Oil cuts take $11bn bite out of Saudi exports
• Saudi 2023 growth forecast cut to 1.9% by IMF
• Opec’s challenge: oil market stability and sustainability

“This additional voluntary cut comes to reinforce the precautionary efforts made by Opec+ countries with the aim of supporting the stability and balance of oil markets,” an official source at the ministry of energy told the state-owned Saudi Press Agency (Spa) on Thursday.

The kingdom’s production for the month of September will be nine million barrels per day, said the source.

The Saudi finance ministry also announced on Thursday that the kingdom’s economy had posted a budget deficit of SAR5.3 billion ($1.41 billion) in the second quarter of 2023.

Total revenues in the quarter stood at SAR314.8 billion, of which oil revenue totalled SAR179.7 billion, or 57 percent. 

In light of Saudi’s September oil output cuts, London-based Capital Economics forecasts that its economy will contract by around 0.5 percent in 2023. 

Barring the pandemic and the global financial crisis, this would rank as the worst GDP performance in over two decades. 

Capital Economics on July 31 issued a research note in which it said that the kingdom’s flash GDP estimate showed that the economy fell into a technical recession in Q2 as a result of the output cuts which led the oil industry to shrink by 1.4 percent. 

Interest rates have risen in Saudi in lockstep with the hikes made by the US Federal Reserve. 

The Saudi Arabian Interbank Rate was over 6 percent on Monday – the highest it has been since January 2001.

Capital Economics said on Thursday that to prevent credit growth slowing sharply, the Saudi central bank may be forced to provide liquidity again.

It noted that the excess liquidity of commercial banks is still at historically low levels of just 2 percent of total assets. 

Saudi Arabia is already the largest foreign dollar bond issuer among major emerging markets in 2023, but James Swanston, Middle East and North Africa economist at Capital Economics, thinks they may now look to issue further debt to finance the shortfalls. 

“From the breakdown of the Q2 budget figures, we saw that the government has turned to debt issuance as its method of financing the deficit,” Swanston said.

“Given that the spread of dollar bonds over US Treasuries still remains low and the Fed’s tightening cycle appears to be over, I would expect that the government continues to issue debt as their primary method of deficit financing.” 

According to the official ministry of energy source that spoke to Spa on Thursday, Saudi’s oil cut can be “extended, or extended and deepened.” 

James Reeve, chief economist at Jadwa Investment in Riyadh, said that he assumes the cuts will be rolled over, but doubts they will be deepened. 

“We see the market tightening of its own accord,” Reeve said. 

“That said, if oil demand were to suddenly fall off a cliff – for example if the US economy tipped abruptly into recession – then deeper cuts would certainly be a possibility.”

Swanston believes that Saudi Arabia will end its voluntary oil output cut at the end of September. 

“The Saudi government may worry about internal Opec dynamics, particularly with the UAE, if it is felt that it is foregoing market share against the backdrop of Russian oil exports not falling as expected,” he said.