Saudi Arabia And Russia: Who Will Back Down First?

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Eirini Tsekeridou (Julius Baer) | Oil prices have declined massively over the last weeks, as Russia and Saudi Arabia could not reach an agreement regarding output cuts. Saudi Arabia is trying to punish Russia, while Russia is seeking to hurt US oil producers due to US sanctioning of Russian companies. US shale producers, especially the highly leveraged ones, will face default as their breakeven price is about USD 50 per barrel.

Between Russia and Saudi Arabia, the current oil price environment is more painful for Saudi Arabia at the moment. Although they extract oil at very low cost, they need a price above USD 80 per barrel to balance the budget. In comparison, Russia’s fiscal breakeven oil price is about USD 43 per barrel, much lower than its 2014 level, and very close to our 12-month oil forecast of USD 45 per barrel. In the current environment, Saudi Arabia is set to report a budget deficit that could reach 20% of its GDP.

International reserves can be utilised to help withstand the current price war. Russia’s reserves of USD580bn can cover holes in the budget for the next five years, according to Russian officials, while Saudi Arabia’s reserves of USD500bn could also provide support. However, Russia has the additional benefit of a floating currency that it could weaken to compensate for low oil prices, in contrast to Saudi Arabia, whose riyal is pegged to the US dollar. As such, we expect that Russia has more means than Saudi Arabia to withstand these low oil prices for longer, but in the end, the situation is not sustainable for either of them.

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