DALLAS (Reuters Breakingviews) - Saudi Arabia needs OPEC cuts to work, but not too well. The oil cartel agreed to extend cuts to production until the end of 2018 on Thursday. Its moderation so far has drained inventories and lifted prices. Further cuts won’t boost prices to the point where Saudi’s budget is in balance. Then again, that gives Saudi’s young crown prince a reason to continue reforms.
The Organization of the Petroleum Exporting Countries’ cuts, which started just shy of a year ago, took some time to show up in the numbers. By October, helped by healthy demand for oil, commercial inventories among OECD countries had fallen to just 140 million barrels more than the five-year moving average, draining more than half the previous glut. The cuts have helped push up Brent crude prices more than 10 percent this year.
Saudi Arabia has become more disciplined in its spending, too. The kingdom gets the bulk of its oil revenue by taxing oil producer Saudi Aramco (IPO-ARMO.SE). A cut to the company’s tax rate ahead of its initial public offering could reduce the state’s haul, but so far, Saudi’s finances are going in a helpful direction. The International Monetary Fund says the country’s fiscal breakeven will fall almost a quarter in 2017 from the last year to $73.10 per barrel.
OPEC’s restraint could push prices up more in the nearer term – on Thursday the price rose over 1 percent to nearly $64. But it helps Saudi’s financial position only to a point. Shale drillers in the United States are stepping in to make up for some of OPEC’s declines, which will keep prices in check next year. And if cuts don’t have a more visible effect, some OPEC members might start to wonder what the point is. The IMF predicts oil staying around $50. The Energy Information Administration pegs the price slightly higher at $56 a barrel.
This plays nicely into the narrative created by Saudi Crown Prince Mohammed bin Salman. His grand vision of diversifying the country’s economy away from oil has spawned plans for giant new cities in the desert, moderate social liberalization, and a corruption purge that touched on several royal family members. An elongated increase to oil prices – neither too fast, nor too slow – gives him the mandate, and the time, to get more done.
Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.
Sign up for a free trial of our full service at https://www.breakingviews.com/trial and follow us on Twitter @Breakingviews and at www.breakingviews.com. All opinions expressed are those of the authors.