In an interview with CNN, Saudi Oil minister Ali al-Naimi confirmed that the current Saudi oil price target was “around USD 100/bbl.” This is the first official confirmation that the old USD 70-80/bbl range is dead.
Naimi’s statement confirms our view that the Saudis have been targeting a three-digit oil price, in view of the tardiness of their supply response to the spike in oil prices following the start of the Arab Spring. The statement appeared to boost oil prices, at least initially, presumably on the basis that OPEC is more likely to intervene to support prices because Saudi now needs a higher price to balance its books and because Naimi indicated that Saudi production might have fallen to 9.4-9.8mmbd.
While Saudi Arabia’s fiscal breakeven oil price has risen more than USD 30/bbl over the last three years (Figure 2), most estimates still put the breakeven price
for 2012 at around the USD 80/bbl mark. That leaves the Saudis substantial flexibility in riding considerably lower oil prices before suffering any meaningful budgetary pressure. So, we do not see budget issues as a definitive driver for the Saudis to defend the new target.
We believe that the market is currently oversupplied by around 1mmbd. While we do expect some accommodation by Saudi Arabia to rising Libyan volumes, we do not expect it to reduce production significantly below spring 2011 levels without a meaningful contribution from other OPEC members, should that be necessary to keep the oil price around USD 100/bbl, which we believe is quite likely. Naimi also reiterated that Saudi had at least 2mmbd of spare capacity immediately on hand, with a further 700mbd available within 90 days.