Paying the Bills
While oil prices have been cut in half, it seems Saudi Arabia is having a hard time paying the bills. Bloomberg News is reporting that Saudi Arabia is delaying payments to government contractors, some as much as months late, as the slump in oil prices pushes the country into a deficit for the first time since 2009.
While Saudi inventories swell, the price war that Saudi Arabia started is having a major impact on the Saudi economy.They are fighting a proxy war in Yemen and fighting enemies from within and the stress is starting to show in their non-payment to contractors.
Bloomberg Says that, “Saudi Arabia is tackling the slump in crude, which accounts for about 80 percent of revenue, by tapping foreign reserves, cutting spending and selling bonds. Net foreign assets fell by about $82 billion at the end of August after reaching an all-time high last year. The country has raised 55 billion riyals ($15 billion) from debt issuance this year. The government is also seeking to cut capital spending and delay projects.”
The Financial Times reported that, “On Sunday, Iran, the US and the EU reached the “adoption day” by which all sides start procedures to fulfill their commitments to implement the nuclear accord. Sanctions are expected to be lifted in early 2016. Mr Zanganeh said Iran could increase production by 500,000 b/d immediately after the lifting of sanctions and reach its pre-sanctions output level within seven months.
While international energy analysts have said plans to reach its former 3.4m b/d production rate within 12 months are ambitious, any supply increase will come as oil markets already face a persistent glut that has more than halved prices in the past 16 months.”
In the meantime, oil prices are under pressure after subpar data came out of China. China's GDP beat expectations at 6.9 percent in the third quarter, but it was still its slowest reading in 6 years. The fear of a China slowdown impacting energy demand is one reason why oil prices have been under pressure.
Yet the fundamentals surrounding oil may be changing as the Saudis can’t afford this price war and cap x cuts in energy keep coming. Well over $200 billion of energy projects have been canceled leading to a historic point in energy. The cuts in cap that we see today will lead to tighter supplies and higher prices in the future.