- Wide gap between KSA’s budget breakeven crude oil price of USD82/BBL and spot Brent price (c.USD50/BBL) leads to large fiscal imbalance. KSA government has budgeted 2017 fiscal deficit of 7.7% of GDP using average oil realization price of c.USD50/BBL. On a separate note, lowering the breakeven oil price implies lower spending, which is equally damaging for the economy.
- The rebounding of Brent, which continues to trade at c.USD50/BBL level, to ≥USD80/BBL by 2020 looks far-fetched as the crude oil market is oversupplied and the US shale production grows higher.
- SAR-USD exchange rate looks overvalued, with widening gap between Brent (proxy for SAR) and dollar index.
- Forward currency market has started to factor-in SAR devaluation as SAR is trading above the official peg rate of 3.75/USD.
- Pressure is on KSA to devalue SAR against the backdrop of 20–100% depreciation in currencies of leading crude oil exporters (Russia, Brazil, Nigeria, Mexico) since January 2015 till date.