Oil fell 3 per cent on Monday, with global benchmark Brent back near 11-year lows as last week’s rally ran out of steam, and players worried that crude prices had more room to fall.
Crude futures fist slumped in Asian trading as Japanese data showed a 46-year low in oil sales in the world’s fourth largest crude buyer. They slid more in the New York session, as some traders reckoned the two-day pre-Christmas rebound, where crude rose about $2 a barrel, had been overdone and worries continued about the glut of oil on the market and the outlook for global growth. The falling oil price has forced Saudi Arabia to announce a major policy shift, increasing taxes and cutting spending in the wake of a widening deficit.
Brent was down 98 cents at $36.93 a barrel by Monday evening, falling to a session low of $36.56 earlier. It hit a 2004 low of $35.98 on Tuesday.
US crude’s West Texas Intermediate futures fell $1.25 to $36.85, slipping to $36.66 at one point. Figures from the Organisation of the Petroleum Exporting Countries imply an oil glut of more than 2 million barrels per day, equal to more than 2 per cent of world demand.
Crude prices have plunged nearly 70 per cent from highs above $100 a barrel in June 2014 after OPEC, led by top exporter Saudi Arabia, dropped its longstanding policy of cutting output to support prices in favour of defending market share.
While the collapse has partly achieved OPEC’s goals by curbing growth of competing supplies, it has also put the finances of oil producing nations under strain.
The falling oil price on Monday led Saudi Arabia to announce plans to shrink a record state budget deficit with spending cuts and a drive to raise revenues from sources other than oil, including tax and privatisation.
The 2016 budget, released by the finance ministry on Monday, marked the biggest shake-up to economic policy in the world’s top crude exporter for over a decade, and includes politically sensitive reforms from which authorities previously shied away. The plan suggests the kingdom is not counting on a major recovery of oil prices any time soon but is instead preparing for a multi-year period of cheap oil.
The International Monetary Fund warned in October that Riyadh would run out of money within five years if it did not tighten its belt. “Our economy has the potential to meet challenges,” King Salman said in a speech, adding the 2016 budget launched a phase in which his kingdom would diversify its revenues.
The government ran a deficit of 367 billion riyals (€91 billion billion) or 15 per cent of gross domestic product in 2015, officials said.
The 2016 budget plan aims to cut that to 326 billion riyals, reducing pressure on Riyadh to pay its bills by liquidating assets held abroad and issuing bonds.
Next year’s budget projects spending of 840 billion riyals, down from 975 billion riyals actually spent this year. The success or failure of the budget plan will be key to maintaining the confidence of financial markets in Riyadh. As the deficit has swelled, the riyal has dropped in the forwards market to its lowest since 1999 because of fears Riyadh may eventually have to abandon its peg to the US dollar.
–(Reuters)
