Is the oil price heading towards another fall?

24 March 2016

The low crude price has been a catalyst for reform in Saudi Arabia and bank liquidity remains strong for 2016

Oil has been forecast to be priced at an average of $33 a barrel for the year by Saudi Arabia’s Jadwa Investment, with the potential for a dip in price in the second quarter.

In recent weeks, the price has rallied, with Brent crude climbing from a low of about $28 a barrel to $41.

Fahad Alturki, chief economist and head of research at Jadwa Investment, said the market remains oversupplied and demand continues to be weak, which will keep pressure on the price. But it has been a catalyst for reform in the kingdom’s economy, he said.

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Is the oil price heading towards another fall?

“I think low oil prices will create enough pressure within the Saudi economy for reform, [and] for the development of the National Transformation Programme, which we anticipate to be announced by mid-April,” he said on the sidelines of MEED’s Outlook Saudi Arabia conference.

The drive to diversify the economy will help foster a stronger business environment for private companies in the kingdom, although the role they play will take time and “need a multi-year reform programme”, said Monica Malik, chief economist at Abu Dhabi Commercial Bank (ADCB).

“We believe it is a very positive start, concurrent with the budget that came out in December. Saudi Arabia announced a number of fiscal reforms as well as a pull back in spending, including reducing subsidies…. But we see this really as the beginning of the process. If we look at the reforms done so far, they’re relatively small compared with the amount of subsidies that need to be paid [by the government].”

The depressed price has created concerns about the level of bank liquidity in the kingdom. Alturki said there is enough available money to ensure there is no liquidity pressure this year, but that if markets do not pick up, Saudi Arabia could start to experience a liquidity squeeze by 2017.

“The government [and the] private sector need… about SR200bn [$53.3bn],” he said. “The available liquidity that can support such financial needs in the banking sector in the kingdom is about SR350bn. So there is enough liquidity.”

“While we do see that challenges have increased [and] liquidity has tightened somewhat, Saudi Arabia is in a very strong position,” said Malik. "FX [foreign exchange] reserves are very strong and that put together with the fiscal reform programmes and the move to wider structural reforms, hopefully we see the outcome in the medium term to be positive.”

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