June 1, 2012 / 12:20 PM / 7 years ago

Saudi unlikely to cut soon despite oil under $100

* Saudi able to handle sub-$100 a barrel oil
    * Riyadh seen unlikely to rush to cut back record output
    * Iran, exports falling, needs $117 crude to balance
budget-IMF

    By Peg Mackey and Alex Lawler	
    LONDON, June 1 (Reuters) - Oil's fall below $100 a barrel is
unlikely to trigger a swift supply cut from OPEC power Saudi
Arabia, which is pumping at its highest rate in decades, because
its budget can comfortably withstand a much lower price.	
    Others in the Organization of the Petroleum Exporting
Countries, including Iran and Iraq, need a higher price than
Saudi Arabia to balance budgets and they may call on Riyadh to
throttle back when producers meet on June 14 to set output
policy. 	
    Having campaigned aggressively to bring down oil prices that
were damaging global economic growth, Saudi Oil Minister Ali
al-Naimi may be reluctant to turn down the taps just yet. 	
    "If prices come down very severely before the meeting, there
could be discussion of a cut," said a Gulf OPEC delegate, who
declined to be identified.	
    Brent crude would have to drop below $90 a barrel to
convince Riyadh and its Gulf Arab allies Kuwait and the United
Arab Emirates of the need to consider curbing supplies, the
delegate said.	
    Naimi began talking oil prices down in March as Brent crude
moved toward a peak of $128 a barrel, lifting output to back his
words. Brent traded down around $3.00 to below $99 a
barrel on Friday. 	
    With the United States, the UK and France threatening to
release emergency stocks, Riyadh pushed output beyond 10 million
barrels a day for the first time in 30 years. 	
    Talk of an emergency reserve release by consumer countries
has since gone quiet and Riyadh is unlikely to want to provoke
it again ahead of U.S. presidential elections in November.	
    Gasoline costs, a leading issue for the election campaign,
have dropped down the agenda with the fall in prices.	
    	
    HUGE RESERVES	
    Saudi Arabia has huge foreign currency reserves and will be
shielded by surpluses built up from high prices for the year to
date. Brent so far in 2012 is averaging $117 a barrel, up from
2011's $110, which was a record high.	
    For Saudi Arabia and its Gulf allies, $100 is more than
adequate to support budget requirements. Saudi's breakeven price
is around $70-$80, according to bankers and analysts, and
Kuwait's is among the lowest in OPEC at $45-$55.	
    "$100 is a very comfortable price for our budget," Saudi
Finance Minister Ibrahim Alassaf said last week.  	
    Riyadh shows no sign yet of reducing output despite surplus
supplies. Global output is now outpacing demand by about 1.5
million barrels daily on the 90 million bpd world market, Naimi
said recently. Oil at $100 is "great", he said in Australia in
mid-May.	
    But it's not so great for those in OPEC whose budgets are
strained by oil below $100. Iran, Iraq, Algeria and Libya are
among the most exposed, according to the International Monetary
Fund and they need oil prices in triple digits to stay in the
black.	
    Iran in particular will feel the pinch. Tehran requires $117
to balance the books, according to the IMF, and has seen oil
production and revenue sunk by Western sanctions directed
against the country's nuclear programme.	
    Production may fall further when a European Union oil
embargo takes effect on July 1.	
    Iran is fuming over the rise in Saudi output that has
cushioned the impact for consumers of the U.S. and European
measures and could press its case at OPEC.	
    "Iran is not happy about the high level of OPEC production -
specially from Saudi Arabia," an Iranian oil source said last
week.       	
    	
    MARGINAL BARREL	
    Leading oil companies will also start to feel the pain of
lower prices and, say some analysts, are likely to start
trimming high cost production. According to Bernstein Research,
the marginal cost of production was $92 a barrel in 2011.	
    "The marginal cost of production is the ultimate floor in
the oil market. In the North Sea it can be $80 to $100," said
Andrew Moorfield, head of EMEA energy at Scotiabank. 	
    "But the real marginal cost of production also includes
social costs that some big oil producers need to pay."	
    	
    Following is a table of some OPEC producers' fiscal
breakeven oil prices:	
                $/bbl
 Algeria        105
 Iran           117
 Iraq           112
 Kuwait         44
 Libya          117
 Qatar          42
 Saudi Arabia   71
 UAE            84
 Sources: National authorities and International Monetary Fund
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