Saudi Arabia more likely to cut oil output than de-peg riyal: analysis

Saudi Arabia is more likely to cut oil production than devalue or de-peg its currency from the US dollar if it is faced with the choice due to mounting pressures from low oil prices, analysts told Argaam.

“The probability of a de-peg of the Riyal is limited, because it would send signals to investors that Saudi Arabia has chosen to loosen its currency rather than cut oil supply,” Jameel Ahmad, chief market analyst at global online broker FXTM said.

“This would threaten to send the price of oil into an even deeper crash and would anyway immediately limit any impact of a weak currency,” he warned, adding that only an oil market rebound driven by an OPEC-led supply cut would be effective enough to ease pressure on revenues.

Shoaib Abedi, director at UK-based ICM Capital also sees scaling back on crude production as the less damaging option, but he said such a decision would only be seriously considered if oil prices fall to the range of $25 per barrel.

Their comments come of the back of recent reports that painted a mixed picture about the future of the Saudi Riyal.

Last week, Bank of America Merrill Lynch (BofAML) said that a de-peg of the riyal would be the number one “black-swan event” for the global oil market in 2016, adding that it would be politically easier for the kingdom to modestly cut oil supplies.

A drain on Saudi Arabia’s foreign exchange (FX) reserves could accelerate to $18 billion per month if oil prices remain in the $30 per barrel range, BofAML warned.

Earlier this week, London-based Capital Economics argued that a devaluation of the currency is Saudi Arabia’s last resort. The firm expects the government to continue with capital spending cuts and similar options over the next few years before taking such a drastic step.

Lately, there has been growing speculation that the kingdom would follow China and Kazakhstan in devaluing its currency in an effort to boost exports and shore up economic growth.

In the unlikely event that the kingdom does depreciate its currency, global markets could weaken, as investors would be concerned about pressure on the dollar and the possibility of a domino effect in the Gulf region.

“If a Riyal de-peg transpired, it would only be a matter of time before suspicions arise that a similar move could occur in the UAE Dirham, as an example,” Ahmad added.

Last week, the riyal hit a 12-year low against the dollar in the one-year forwards market as falling oil prices have kept Saudi Arabia under pressure.

 Write to Joumana Saad at joumana.saad@argaamplus.com