You have to hand it to Saudi Arabia. The Kingdom ruled global oil markets for nearly 40 years, increasing or decreasing production as it willed, playing the role of global oil markets swing producer. The OPEC de facto leader, and the second largest global oil producer now after Russia, has simply lost its footing.
The Reason? The U.S. shale oil and gas boom. The problem for the Saudis is that they have been caught in a snare of their own making. When global oil markets first became over supplied in 2014 due to increased U.S. oil production, the Saudis in their now infamous November 2014 decision, decided to not pull back production to support plunging prices.
The Saudis have take a step further, actually increasing production in the past two years. The effects have been cataclysmic for the global oil industry. Prices, which topped off at $114 during the summer of 2014 are now trading in the low to mid $40s level, after dipping into the $20s mark earlier this year – a pricing scenario unthinkable just a few years ago.
Massive oil industry lay-offs, bankruptcies and a general downturn in the sector has ensued, with little respite on the horizon. Now, the Saudis are having to contend with Iran, post sanctions on Tehran’s energy sector, for market share in both Europe and Asia. Unfortunately, for the Saudis, Iran is willing to cut prices to the bone in order to reach a pre-sanction production level of 4 million barrels per day.
Saudi Arabia is also losing market share in Asia to Russia, including China’s vast oil market, which could soon surpass the U.S. as the word’s largest oil importer.
Saudis need cash to offset historic budget deficits
Global Oil Demand is Always Rising – and Not Related to Price
Now, news has broken that the Saudis, amid this ongoing oil industry dilemma, is burning through foreign reserve holdings. Media reported on Monday that the Kingdom’s foreign reserve holdings, likely in U.S. dollars, dropped 16%, from the same period in 2015, to $555 billion. This marks a drop of $6 billion from July, and their lowest level since February 2012. Holdings peaked in August 2014 at $737 billion before prices tanked in July that year.
The Saudis are also running budget deficits attributed to the prolonged oil price down turn. The Saudi budget deficit hit a record $98 billion last year, but Riyadh expects this figure to drop to $87 billion this year. The government has been borrowing domestically and abroad to help reduce the deficit.
Saudi Arabia will also issue its first international bonds in October to raise at least $10 billion, Bloomberg reported. Citigroup C +1.50%, HSBC and JPMorgan Chase JPM +0.80% were hired as global coordinators for the sale.