Reasons to remain sceptical of “major shift” in Saudi oil policy

The recent agreement reached by OPEC and other oil producers to cut output has prompted speculation of a major shift in Saudi Arabia’s oil policy, but we remain cautious. After all, the Kingdom has agreed to a cut in production that is not drastically out of line with seasonal fluctuations. Admittedly, Oil Minister, Khalid al-Falih, has hinted that Saudi Arabia may be willing to cut by more than that agreed. But he said that such a move depends on “market conditions” – in other words, it would only be considered if there was a fresh sharp and sustained fall in oil prices. We think this is unlikely. In any case, the key pillars of the country’s oil policy of the past two years remain in place and we suspect that the Kingdom agreed to take some action simply to prevent the OPEC meeting ending in acrimony. The upshot is that the authorities will continue to pursue fiscal austerity in order to adjust to low oil prices. The upcoming budget should provide some clarity on the government’s fiscal plans for 2017.