Low Oil Prices Continue To Decimate Saudi Arabia’s Currency Reserves

The low oil price continues to wreak financial havoc on the largest oil producer in the Middle East.  While the Mainstream press has published articles forecasting a rebound in Saudi Arabia’s financial outlook, due to higher oil prices this year, it seems like the Kingdom’s problems are just beginning.

In order to make up for falling oil revenues, Saudi Arabia has been liquidating its foreign currency reserves at a pretty good rate over the past two and a half years.  I discussed this in my article, Bankrupting OPEC… One Million Barrels Of Oil At A Time.  In that article I published this chart:

Due to the rapid oil price decline, Saudi Arabia liquidated 27% of its foreign currency reserves.  At its peak, Saudi Arabia held $797 billion in foreign currency reserves.  In just two and a half years, Saudi Arabia’s currency reserves declined $258 billion (U.S. Dollars) to $536 billion currently (Dec 2016).

I also published the following chart showing Saudi Arabia’s foreign currency reserves declined in 2016, even as the oil price recovered from a low of $30.7 in January to a high of $53.3 in December:

Now, what’s even more interesting… is that Saudi Arabia’s foreign currency reserves took another BIG HIT in January, by falling $12.5 billion in just one month:

Saudi Arabia’s foreign currency reserves fell from $536.3 billion in Dec 2016, to $523.8 billion in January.  The chart displays the figures in Saudi Arabia Riyal.  They were converted to U.S. Dollars.  This is a pretty good drop in just one month.  Moreover, this occurred even as the oil price increased to $54.6 a barrel in January versus $53.3 in December.

I would imagine some would assume that this fall in exchange reserves may have been due to the recent Saudi oil production cut.  While it is true that Saudi Arabia has cut oil production, as well as exports, this only accounts for a small portion of the $12.5 billion decline in foreign currency reserves.

For example, according to the Bloomberg article, Saudi Arabia Oil Tanker Tracking Shows Exports Slide In February:

While Saudi Arabia has the ability to store crude — meaning that its exports aren’t perfectly correlated with production — a month-on-month decline in exports would support the country’s assertion it’s cutting back. Exports fell from about 7.16 million barrels a day in January, according to Bloomberg calculations based on industry standard cargo sizes.

Saudi Arabia exported about 7.64 million barrels a day in October, according to figures from the Joint Organisations Data Initiative. Riyadh-based JODI collates data including production and exports directly from countries. Shipments exceeded 8 million barrels a day in both November and December. The deal to cut supply took effect at the beginning of the year.

The article states that Saudi Arabia’s oil exports declined from 8+ million barrels per day in November and December, down to 7.16 million barrels per day in January.   If we do some simple math, we have the following:

JAN 2017 = 1 million barrel per day cut x 31 days = 31 million barrels X $54.58 = -$1.7 billion

If we assume that Saudi Arabia was paid spot price of $54.58 for each barrel (they didn’t, they have long-term contracts), then they would have lost $1.7 billion in oil revenue for the 1 million barrel per day cut in exports in January.  So, if we subtract the $1.7 billion in lost oil revenues in January from the $12.5 billion in foreign exchange reserve liquidation, there’s a difference of about $10.8 billion.

For whatever reason, Saudi Arabia had to sell off another $12.5 billion of its foreign exchange reserves in January to make up for lost oil export revenue.  To make matters even worse, Saudi Arabia To Slash Capital Expenditures by 71%:

With the largest budget shortfall among the world’s 20 biggest economies, Saudi Arabia is planning more austerity measures this year. The kingdom will scrap projects worth more than $20 billion as it comes to terms with cheaper oil.

According to the Saudi government’s bond prospectus obtained by Bloomberg, capital expenditure is expected to fall to $20.6 billion (75.8 billion riyals) this year compared with $70.2 billion (263.7 billion riyals) in 2015. Two years ago, the country’s capital spending was $98.6 billion (370 billion riyals).

Saudi Arabia is in serious trouble if it has to cut its capital expenditures by 71% this year.  In addition, the Kingdom is placing its hope on the upcoming Saudi Aramco IPO.  Saudi Aramco values its assets at $2 trillion and its five percent initial offering could be worth $200 billion.  However, Wood Mackenzie believes Saudi Aramco’s assets are worth much less…. 80% less.  From the article linked above:

Now, analysts at Wood Mackenzie have conducted their own study of Saudi Aramco, and came up with a completely different (and much lower) figure. WoodMac puts Aramco’s true value closer to $400 billion, eighty percent less than the Saudi estimate, and it arrived at the figure by considering future demand and the anticipated average price of oil (on which profits will depend), as well as Saudi Aramco’s status as a state-run company.

If I had to choose between these two different asset valuations, I would probably side with Wood Mackenzie.  I have read several of their reports and trust their figures over the Saudi’s as they are more objective.  Regardless, if the oil price continues to decline, Saudi Arabia will likely have to liquidate more of its foreign currency reserves to fill in the gap from insufficient oil export revenues.

According to the data by the EIA – U.S. Energy Information Agency, Saudi Arabia’s oil export revenues fell nearly 50% from $247 billion in 2014 down to $130 billion in 2015.  And the figures for 2016 were even worse.  The EIA only has data for the first five months of the year, which reports Saudi Arabia’s oil export revenue was a measly $39 billion.  Even though the oil price rebounded towards the end of the year, Saudi Arabia’s oil export revenue was probably less than $110 billion in 2016.

Investors need to keep an eye on the U.S. and global oil industries this year.  If we do see continued weakness in the oil price, this could spell BIG TROUBLE for an industry that is the backbone of the global economy.

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6 Comments on "Low Oil Prices Continue To Decimate Saudi Arabia’s Currency Reserves"

  1. vlad the impaler | March 14, 2017 at 3:14 am | Reply

    If US dolar denominated assets were discarded, it would be a game changer for PMs holders and the world. In comparison with this Saudi Arabia is a sideshow as the biggest US bond holders still maintain their investments supporting the US dolar as reserve currency. A country is in trouble if it is unable to find buyers for its bonds at reasonable prices. Recent crises have demonstrated that the US dolar is regarded as a safe haven during market turmoil. Numerous specialists predicted the dolar demise but it has failed to materialize so far.

  2. I find it fascinating to see the parallels between oil/energy and the gold/mining sector. While oil is the driver of the global economy, gold is the ultimate financial ancor (not to say “standard”; e.i. real money) of the system which is lubricated and manipulated by fiat values. For both gold and oil the “price” (not to say value) can’t ever be right under the status quo. For the producers it is too low (they sell at a loss or are just treading water at best, driven by falling EROEI) and for the real economy it’s too high (in the case of oil, due to fiat inflation and stagnant/falling real wages) or not understood in terms of its ultimate monetary value in the case of gold (decades of systemic western brainwashing was 99.9% successful). Ultimately, something is gonna give and it won’t be pretty. When, is anyones guess but it’s drawing closer: the consequences of ignoring reality for too long will snap back with vengeance.

    Steve, your upgraded site looks great – job well done!

  3. If the Saudi’s are smart they are liquidating their reserves to buy Gold …. just as likely as not !

  4. The saudi reserves are massively overstsated. Back in the 1980s they were inflated to keep up with OPEC quotas. I think inflated overnight from 170BB to 260BB. Since that time, they have remained unchanged even though production must have reduced them. Also, the Saudi’s get half of their oil production from just one giant field called Ghawar. Its been pumped for more than 70 years. Water cuts are approaching 50% in some spots. The EROI has fallen. Only they know how much. But handling all that water cannot help. They have some newer fields but nothing can replace Ghawar. I’m not surprized they are selling off the asset. However, I don’t think the likes of Exxon, Shell or BP are that dumb to overbid.

    Like the USA with its welfare state, the Saudi’s need the money for social stability. The Emir stays in power because he can pay. When he is Bankrupt he will be out and ISIS will take over. They will kick out their new Western partners, cut production, cut the welfare state back and kick butt internally. When this sad day comes, it will be bad for those dependent on Saudi crude, but it will be much worse for those who live in Arabia.

  5. Other than oil what has Saudi ever exported to the world but misery. It is bombing Yehmen to oblivion, the population of that country starving to death. The UN as always is useless and the West always looks the other way when it comes to Saudi (due to the whole, stinking petro-dollar farce that Kissinger put into place), along with the fact that the US, UK, Germany, France and Italy sell arms to Saudi (and have been for decades). Saudi, like Qatar, has sheltered, trained and assisted ISIS, again the West looks away. So I hope the stinking House Of Saud falls by its own filthy greed and corruption. Despite its huge wealth it hasn’t taken any refugees from Syria or Iraq. If there had been no oil in the Middle East these carpet worshippers would still be merrily swapping camels for goats and the world would be a better place. The West needing oil and the Middle East having it has resulted in endless conflicts within the Middle East and of course the West earning itself a massive badge of shame for the part we have played in all the death and destruction. Meantime the Western Neotards have een merrily importing millions of Muslims who are now out breeding us, in many cases despise us and who adhere to a Stone Age religion which abuses women and has no concept of democracy. Welcome to another century of madness.

  6. DjBenson,
    I can’t argue much with your assertions. However if the house of Saud falls it will be trouble. Arabia had 3 million people in the 1960s soon they will have 30 million that is a lot of refugees for Europe.

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