Saudi Arabia spending means less room for OPEC output cut

Saudi Arabia’s plan to continue spending on social projects and security increases the likelihood that the world’s biggest oil exporter will stick with OPEC’s policy of maintaining output even as crude prices plunge.

“Saudi Arabia is backing up OPEC policy with action to strengthen the home front against the adverse impact of falling oil prices,” Arabia Monitor chief economist Florence Eid-Oakden, whose firm advises investors on business risks in the Middle East, said.

The Saudi stock market rebounded after Finance Minister Ibrahim al-Assaf announced that the government plans to fund “massive” development projects next year, focusing on health care, education, social services and security.

The Tadawul stock index lost almost a third of its value since September amid expectations that falling oil prices will curtail government spending.

OPEC decided November 27 to keep its output unchanged, in spite of a global supply glut fed partly by production of shale oil in North America.

Saudi Arabia led a group of Arab monarchies in opposing calls by Venezuele and other OPEC members, whose economies are threatened by the fall in oil prices, to cut output. OPEC supplies about 40 percent of the world’s oil.

“We do believe the Saudis when they say they are prepared for an extended period of low prices, long enough in duration to achieve their goal of slowing and possibly reversing US production growth,” Michael Wittner at Societe Generale SA said.

Brent crude, a pricing benchmark for more than half of the world’s oil, has dropped 47 percent this year and slid below $60 a barrel this week for the first time since 2009.

OPEC members Angola, Algeria and Iran are “under stress,” OPEC President and Nigerian petroleum minister Diezani Alison-Madueke said December 4. Venezuela’s bonds dropped to a record low Tuesday, fueling speculation that the nation may default. Nigeria’s currency, the naira, fell to the lowest against the dollar on Monday since Bloomberg began compiling data in 1999.