Tuesday, December 29, 2009

Oil Number to Watch in 2010

OPEC members and particularly the Saudi Arabians are the marginal global oil price setters due to their creation and use of spare production capacity.  Saudi Arabia is the de facto leader of OPEC with the highest production and spare capacity volumes.  Last week the government of Saudi Arabia outlined its budget for 2010.  With a few simple calculations the Saudi budget provides guidance as to the minimum oil price OPEC will likely seek to defend over the coming year.

2009 Saudi Budget in Review
Crude oil, basis NYMEX WTI, averaged US$62.02 per barrel between January 1 and December 29, 2009.  At this US$62.02 oil price the Saudi government ran a deficit and had to borrow to make up the difference:
"The ministry also said actual spending in 2009 stood at 146.7 billion dollars while actual revenues were 134.7 billion dollars" (Source: AFP)
With Saudi Arabian production of around 8.2 million barrels per day (Mb/d) of conventional crude plus 1.5 Mb/d of NGLs in 2009 the Saudis needed oil prices basis WTI to have averaged around US$65.40 rather than US$62.02 during 2009 to balance their budget.

2010 Saudi Budget Outlook
As global oil demand grows the Saudis are expected to marginally increase production volumes of both their conventional crude and NGLs in 2010.  With the expected increases in production volumes Saudi Arabia's 2010 budget breakeven oil price level will be slightly lower than that needed in 2009.

The Saudis are forecasting a second year of government deficits and borrowing for 2010.  WTI will need to average US$60.50 per barrel to balance the Saudi's 2010 budget without any deficit or US$55.50 with their planned deficit and borrowing to make up the difference.

Although oil prices are well above it now at close to US$79 per barrel, if demand falters or supply increases dramatically then this US$55.50 level will be the 2010 OPEC downside action trigger to watch.
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