IMF Boost to Saudi Break-Even Oil Price Offers OPEC Policy Clues

(Bloomberg) -- Whenever Saudi Arabian officials are asked what oil price the kingdom want, they almost always reply that they have no preference. Recent reports that the world’s largest exporter was aiming for $80 a barrel elicited the same response: there’s no target.

But the International Monetary Fund’s latest report on the Saudi economy shows why the government would like prices to keep climbing, no matter what they say in public.

In a study released Wednesday, The IMF bolstered its estimate for the oil price the kingdom needs to balance the national budget this year to $88 a barrel, 26 percent more than an assessment made in October. Benchmark Brent crude traded at $73 in London on Wednesday.

Saudi Arabia is spearheading a 24-nation coalition of oil producers in output cuts aimed at re-balancing world markets. Though they’ve succeeded in clearing surplus inventories, the kingdom insists the curbs should continue, fanning speculation that it’s main aim has been securing a higher price.

“It gives credibility to that,” said Helima Croft, chief commodities strategist at RBC Capital Markets LLC. “It raises again the interesting question of Saudi switching from being a dove to a hawk” in terms of oil price ambitions.

While Saudi Arabia rulers have always needed sufficient revenues to provide for their citizens, the burden of Crown Prince Mohammad bin Salman is weightier as he pursues dramatic economic transformation and a drawn-out war in Yemen.

The crown prince needs a “bridge price” for oil that’s high enough to cover immediate spending needs while he embarks on social change that ultimately shrinks the role of the state, Croft said.

Saudi Energy Minister Khalid al-Falih, speaking in Jeddah last month, repeated that the kingdom doesn’t pursue a particular price and is focused solely on keeping markets stable over the long-term.

The kingdom’s most powerful ally, the U.S. may see things a little differently. President Donald Trump took to Twitter in April to criticize OPEC for policies that mean higher gasoline prices for American consumers.

The IMF’s increase reflects the government’s plan to boost public spending to a record this year in an attempt to revive economic growth.

“Because of the scale of his regional and domestic ambitions” the Saudis are ‘going to need to have that bridge,” she said.

©2018 Bloomberg L.P.