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As red ink grows in OPEC budgets, so does pressure to make output deal

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Written by Collin Eaton


Saudi Arabia and other major OPEC producers are running large budget deficits after two years of stubbornly low oil prices, adding pressure on the cartel to finalize an agreement to cut production at its formal meeting Wednesday, analysts said.

The Saudi government’s budget deficit has ballooned to one-fifth of its economic output this year despite its $57 billion in spending cuts since oil prices collapsed since peaking more than two years ago, according to Wood Mackenzie. Iraq’s fiscal deficit has also climbed to 20 percent of its economic output, while Kuwait and the United Arab Emirates have respective budget shortfalls equivalent to 12 percent and 9 percent of output of their economies.

“In a low oil price world, Saudi Arabia would have to run down reserves further,” said Ed Rawle, Wood Mackenzie’s chief economist, in an interview. “Any increase in oil prices would reduce that financial pressure.”

Members of the Organization of the Petroleum Exporting Countries, which controls about one-third of the world’s oil supply, reached a preliminary agreement to cut crude oil production by as much as 750,000 barrels during informal talks in Algeria in September. Since then, Saudi Arabia has led efforts to line up support among OPEC nations and craft a final deal.

On Monday, Iraq, which has been reluctant to lower production, said it would cooperate to reach an agreement that would be accepted by all the nations in the cartel, helping to push oil prices higher. Oil rose more than $1 to settle at $47.08 a barrel Monday.

Prices have held between $40 and $50 a barrel for several weeks, swinging up and down according to the latest speculation on whether OPEC will follow through on its Algeria accord.

Oil peaked at about $107 a barrel in June 2014.

OPEC’s efforts to reassert its role as the manager of the world’s oil supplies show that the cartel, too, is feeling the pain of low oil prices. Through most of the oil bust, OPEC, led by Saudi Arabia, was content to let the market sort out supply and demand, and as recently as April chose not to cap or cut production.

But many of the nations rely heavily on oil revenues to fund government services. Saudi Arabia, for example, needs oil at $92 a barrel to balance its budget, according to Wood MacKenzie.

The kingdom has pushed back major infrastructure projects, cut state employee wages and burned through $180 billion in financial reserves, a quarter of its coffers, as oil prices have languished.


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Click HERE to Read the Article by the Publisher.

Written by Collin Eaton

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