Invast Blog

Important to watch Saudi Arabia

A few years ago, many investors have dubbed Australia as the Saudi Arabia of the Asia Pacific. Our economy was benefiting from rising commodity prices – coal, iron ore, metals and energy prices were all higher.  We all know that things have quickly changed. The difference is that Australia’s economy continues to grow strongly – up 0.8% in the past quarter – while Saudi Arabia is showing its vulnerabilities. We don’t quote any Saudi stocks on the Invast DMA CFD platform, but we watch the Saudi economy closely because it has large ramifications for the underlying oil price.

A few facts before we get into Saudi Arabia’s problems. The country is the single largest producer of oil, briefly overtaken by the United States last year as shale exports grew, but we assume that this has since reversed. There is no sign of Saudi Arabia having pulled down production levels much from peak but we’ll get a better idea when the annual BP Statistical Review is out mid this year. It will report on 2015 levels.

Saudi Arabia’s problem is summarised in this one statistic – around 90% of its GDP is somehow linked to the oil industry – either directly or indirectly. Australia has suffered from the mining downturn, but because of our broader GDP base, the slowdown has been offset by growth in other areas. Saudi Arabia now wishes it was the Australia of the Middle East!

Far from that, the Saudi Government is now having to grapple with several tailwinds that sees its fiscal deficit to GDP approaching dangerous levels – some estimates have it at around 12-13% of GDP. The Saudi’s have low sovereign debt compared to the last oil downturn, but the economy is now a lot more reliant on oil and the social challenges are far greater. The country is struggling with growing social unrest – it has high youth unemployment and often criticised by NGO organisations for its human rights record.

Perhaps a sign that challenges are rising, Saudi Arabia recently cut its aid budget to Lebanon by US$4bn. It’s still fighting a war in Yemen and having to provide support to Egypt in the post-revolution years.  A recent agreement between the United States and Iran on its nuclear deal and Russia’s foreign intervention in the Syrian conflict – of which Saudi Arabia is an active regional player – adds further confusion to the mix.

This all has a bearing on how the Saudi’s react to lower oil prices. Many traders comment on the Saudi ability to cut production – what they overlook is the economic problem that this will produce. The harsh reality is that Saudi Arabia cannot afford to cut, because if prices continue to fall, government revenue will keep shrinking. Meanwhile, we’re likely to see Iran continue to ramp up production, making up for lost time as an international outsider. Iran can probably afford a lower oil price over the medium term.

It needs energy as a short term revenue source, but the geography, education and social composition of the country means that there will be many other industrial opportunities outside of energy if oil prices remain depressed for many years.

The smart-money seems to have factored this all in. even though we’ve seen a slight recovery in the Brent crude price, some of this is due to recent dollar depreciation. I doubt very much that we will see a large recovery in oil prices anytime soon. We may have come back to a new normal with Brent consolidating in the US$30-50 per barrel range for some time. Iran stands to gain a lot more than Saudi Arabia under this scenario.

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Happy investing,

Peter Esho

Chief Market Analyst


Peter Esho is a member of Invast’s Investment Committee and Chief Market Analyst at Invast Financial Services in Australia.   The Invast’s Investment Committee constructs professionally constructed global thematic portfolios of Direct Market Access (DMA) CFDs over highly liquid global shares and ETFs through its new PortfolioInvestor platform. Since 1960, the Invast Group has grown to become one of the largest and most successful global brokerage firms, offering state-of-the-art trading technology and unparalleled service catering to all levels of traders.

Invast Financial Services Pty Ltd (ABN 48 162 400 035) is regulated by the Australian Securities and Investments Commission and holds an AFS Licence 438283 which authorises it to carry on a financial services business in Australia.

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