Middle East Enjoys Low Production Cost, Suffers High Fiscal Breakeven

Saudi Arabia is pursuing strategy to crowd out the high cost producers from the market which has faced criticism from some while others remain in line with Saudis.

  • The overproduction strategy seems viable since average production cost in Middle East is below $50/barrel and Saudi production cost is lowest around $20-25/barrel.

However this strategy doesn’t seem that viable when their fiscal breakeven is considered.

  • Budgetary break even for Saudi Arabia is above $100/barrel, while for Iran it stands above $90. Kuwait has the lowest fiscal breakeven below $50/barrel, followed by Qatar at $60/barrel. Details are presented graphically.

Saudi Arabia might feed of its large forex reserve for some time being, which currently stands at $698 billion. However it has fallen sharply from its January peak around $740 billion.

Moreover Saudi Arabia has its exchange rate pegged with dollar at 3.75, which makes it vulnerable if oil continue to remain depressed over the next couple of years.

All of the Middle East countries will require phenomenal fiscal or currency adjustment if oil continues to hover at current price.

Middle Eastern economies face high level of risk domestic turmoil if countries have to drastically adjust budgetary spending.

  • A production cut at this point to pop up prices unlikely to work, as countries like Russia are pumping crude at record speed. Moreover lower export will mean lower revenues, which doesn’t seem affordable at this point.

As a net effect, oil market is likely to remain well supplied in the spot market, which would continue to depress price. WTI is currently trading at $58.4/barrel and Brent at $63.2/barrel.

The material has been provided by InstaForex Company – www.instaforex.com