Saudi Arabia: Oil price increases expected to benefit Saudi Arabia

Event

On 4 October, the OPEC+ met online to discuss their concerted oil policy. In July the group had decided to increase oil production every month by 400,000 barrels per day, until end 2022. Despite supply bottlenecks and demand pressure, they agreed to continue the current pace of production increases for November, and not accelerate production. Following this announcement, oil prices reached a three-year high of over USD 80/barrel.

Impact

In the short term, higher oil prices are significantly benefiting Saudi Arabia – one of the world’s largest oil exporters. The Kingdom’s fiscal and external position are improving thanks to the increased oil prices, as the sector accounted for around 60% of current account receipts and around 50% of public revenues in 2020. The positive momentum for the economy should continue in 2022, as oil production is gradually increasing. However, the outlook is still clouded by uncertainty related to the evolution of the Covid-19 pandemic, as generalised strict containment measures could once again depress oil demand. 

Looking forward, Saudi Arabia still faces the important challenge of diversifying its economy. Despite important reforms including for example female labour participation and the service sector, in the medium term, the country is still projected to remain reliant on the oil sector, thus susceptible to fluctuations in the oil market. In the short term, however, the liquidity risk continues to be mitigated by ample foreign exchange reserves and a large sovereign wealth fund. 

Analyst: Andres Hernandez Cardona – A.HernandezCardona@credendo.com