Oil Prices During An Economic Contraction

Saudi Arabia may overspend budget by 15 percent

RIYADH: Saudi Arabia will overspend its budget by up to 15 percent this year due to spending on construction and job-creation measures, its finance minister said Tuesday.

Worried by unrest sweeping the Arab world, the world’s top oil exporter has pledged to spend an estimated $130 billion, or around 30 percent of its annual economic output, on new houses, creating jobs, unemployment benefits and other measures.

The OPEC member, which relies on hydrocarbons for over 80 percent of budget revenue, has not said how the expenditure will be spread.

“Because of decrees issued by the custodian of two holy mosques, it [spending] will be over [plan],” Finance Minister Ibrahim Alassaf told reporters at a financial conference, referring to King Abdullah’s more formal title in the country that is home to Islam’s two holiest sites.

“We will overspend. I cannot project by how much exactly, but I think it will be 10-15 percent,” Alassaf said.

He reiterated an earlier forecast that Saudi economic growth this year would exceed 4 percent, up from 3.8 percent growth last year.

The biggest Arab economy, which tends to heavily overspend its conservative budget when oil prices are higher, had originally planned to spend 580 billion riyals ($155 billion) in 2011 in its third consecutive record budget.

Robust oil prices – near $98 per barrel on Tuesday – should enable Saudi Arabia to cover the additional spending without having to tap into its record high net foreign asset reserves of $461 billion and could even generate a budget surplus in 2011.

“We might not need to [use foreign reserves],” Alassaf said, adding it was premature to assess the need as it was still early into the year. “We are confident that the current resources will be enough to meet needs [for project financing] due to high oil prices, which is the base of the budget.”

Alassaf did not say what the assumed oil price in the Saudi budget was. When asked, he said: “The suitable price is the price that is good for the market stability.”

Analysts say the oil price Saudi Arabia needs to balance its budget has risen substantially to at least $80 per barrel due to recent social measures. Saudi officials have said that they were comfortable with crude around $70-80.

“I would be concerned about potential uncertainty whether the realized oil price is enough for budgetary purposes,” Blythe Masters, head of global commodities at JPMorgan Chase, told the same event, when asked what oil price she would be looking for.

Read more: http://www.dailystar.com.lb/Business/Middle-East/2011/May-18/Saudi-Arabia-may-overspend-2011-budget-by-up-to-15-pct.ashx#ixzz1Npz9tCsQ
(The Daily Star :: Lebanon News :: http://www.dailystar.com.lb)


Saudi Arabia, world's largest petroleum exporter, needs at least $80 per barrel to prevent budget deficits and maintain social stability.
What is interesting is the comment by commodities speculator Blythe Masters about "potential uncertainty" of crude prices.

Is JP Morgan preparing to short crude oil?

There may be good reason to go short in the near future.

Consider this chart from Elliott Wave International:

Here's the latest round of government data: U.S. home prices fell by 5.5 percent in Q1 vs. a year ago, and lost 2.5 percent vs. the previous quarter; monthly housing starts fell 10.6 percent in April alone.

Looking at housing leads us to believe that economic strength is quite feeble in the United States, the largest consumer of petroleum.

Further, look at the continuous commodities index:

This appears to show some strong downward potential in a variety of commodity prices.

Given these indicators, it is my view that oil prices will begin to slide within 30 to 60 days.