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Lower oil prices could drain Saudi FX reserves by $18B per month: report

Analysts are watching how the Chinese Yuan and the Saudi Riyal will perform against the US dollar in 2016. (File photo)

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Bank of America Merrill

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Global Energy Weekly

The foreign exchange (FX) reserve drain on Saudi Arabia could accelerate to $18 billion per month if Brent crude oil prices average $30 per barrel, adding pressure on the kingdom’s currency, a report said.

Saudi Arabia has been forcing prices lower by increasing production into an oversupplied market so far and it also rushed to issue debt in its local market to fill a soaring budget gap, added Bank of America Merrill Lynch in its research report “Global Energy Weekly”.

"In fact, Saudi Arabia’s FX reserves are still high and point to an ample buffer for now, but they have been falling at a relatively fast rate.

However, should China allow for significantly faster FX depreciation than is currently priced in by markets, we believe oil prices could fall further. Naturally, the FX reserve drain on Saudi could accelerate to $18 billion per month if Brent crude oil prices average $30/bbl, sharply reducing the kingdom’s ability to retain its currency peg," the report said.

“We have previously argued that Saudi Arabia’s surging output is responsible for almost half of the 520 million barrel global petroleum inventory build in the last 7 quarters. Can the government maintain this strategy of flooding the oil market?” the report said.

“In our view, it is unlikely that Saudi leaders would want to exacerbate its ongoing reserve drain by pushing prices below $40 per barrel. After all, pressure will quickly build on the riyal’s 30 year peg to the USD if Brent crude oil prices keep falling. And frankly, it is a lot easier politically to implement a modest supply cut at first than allow for a full-blown currency devaluation. But a CNY (Chinese Yuan) meltdown could ultimately force Saudi’s hand.

“We see cases for both a soft and hard-landing in commodities. In short, a depeg of the Saudi riyal is our number one black-swan event for the global oil market in 2016, a highly unlikely but highly impactful risk. Surely, if Saudi opts to modestly cut supply to push Brent crude oil prices back above $50 per barrel over the next year, EM (emerging markets) growth could stabilize at these low levels and eventually recover,” the report said.

However, if Saudi cannot resist the gravitational forces created by a persistently strong dollar and depegs the Saudi riyal to follow Russia or Brazil, oil prices could collapse to $25 per barrel.

Weaker commodity prices would in turn add more downward pressure on EMs, the report said.

Thus, even if micro supply and demand dynamics are improving, the path for oil prices in 2016 will heavily depend on how the USD moves against the CNY and the Saudi Riyal, according to the report.

New U.S. Ships For Saudi Unsuitable For Iran

WASHINGTON [MENL] -- Saudi Arabia's choice for an advanced U.S. warship was
not regarded as suitable for any conflict with Iran.
A leading U.S. defense analyst said Saudi Arabia's decision to procure
the Multi-Mission Surface Combatants of Lockheed Martin could not defend
against an Iranian missile strike. MMSC, based on the Littoral Combat Ship,
does not contain ballistic missile defense systems that could foil an
Iranian attack.

Saudi Arabian court sentences Palestinian poet Ashraf Fayadh to death for apostasy

A court sentenced him to four years in prison and 800 lashes but after appeal another judge passed a death sentence

Saudi judges have extensive scope to impose sentences according to their own interpretation of Sharia law Getty Images

A Saudi Arabian court has sentenced a Palestinian poet to death for apostasy, abandoning his Muslim faith, according to trial documents seen by Human Rights Watch, its Middle East researcher Adam Coogle said on Friday.

Ashraf Fayadh was detained by the country's religious police in 2013 in Abha, in southwest Saudi Arabia, and then rearrested and tried in early 2014.

The verdict of that court sentenced him to four years in prison and 800 lashes but after appeal another judge passed a death sentence on Fayadh three days ago, said Coogle.

Saudi Arabia's justice system is based on Sharia Islamic law and its judges are clerics from the kingdom's ultra conservative Wahhabi school of Sunni Islam. In the Wahhabi interpretation of Sharia, religious crimes including blasphemy and apostasy incur the death penalty."I have read the trial documents from the lower court verdict in 2014 and another one from 17 November. It is very clear he has been sentenced to death for apostasy," Coogle said.

Saudi judges have extensive scope to impose sentences according to their own interpretation of Sharia law without reference to any previous cases. After a case has been heard by lower courts, appeals courts and the supreme court, a convicted defendant can be pardoned by King Salman.In January liberal writer Raif Badawi was flogged 50 times after his sentencing to 10 years in prison and 1,000 lashes for blasphemy last year, prompting an international outcry. Badawi remains in prison, but diplomats say he is unlikely to be flogged again.

Fayadh's conviction was based on evidence from a prosecution witness who claimed to have heard him cursing God, Islam's Prophet Mohammad and Saudi Arabia, and the contents of a poetry book he had written years earlier.

The case went to the Saudi appeals court and was then returned to the lower court, where a different judge on November 17 increased the sentence to death. The second judge ruled defence witnesses who had challenged the prosecution witness' testimony ineligible.