Saudi Arabia’s big oil gamble will hurt the kingdom — but it’ll likely pay off

April is going to be a hellish month for the oil industry. Already down more than 65% year-to-date, crushed by the coronavirus crisis and the Saudi-Russia oil price war, crude prices are set to tank even further when Saudi Arabia and others turn on the taps following the expiration of the OPEC+ output cut deal on April 1 that had reined in production to boost the market.

Oil at $20 per barrel was unimaginable a few months ago; now some forecasters are calling prices as low as $10 or even single digits as the world runs out of storage space and the global economy grinds to a halt.

But when the dust settles, many analysts believe it’ll be Saudi Arabia — even with its overwhelming reliance on oil revenue — that comes out on top. The kingdom is willingly inflicting pain upon itself by slashing its selling prices and committing to increase production to more than 12 million barrels per day — a record amount — after a bid to cut output together with Russia failed. Its strategy now is going after maximum market share.

Its revenue is taking a massive blow and its budget deficit could rise by 40%, prompting plans for spending cuts and borrowing. The IMF estimates the kingdom needs oil at $80 a barrel to balance its budget; Brent crude closed at $22.74 per barrel on Tuesday, ending its worst quarter ever, with the second quarter expected to be even worse.

Despite the dire numbers, however, enduring months of fiscal pain while it pursues greater exports may ultimately pay off.

“Saudi will definitely be one of the winners on the other side,” Abhi Rajendran, director of research at Energy Intelligence, told CNBC. His call is based on the assumption that oil prices will rebound in 2021 post-coronavirus; his firm sees oil back up to $80 per barrel within three years.

China will likely be a top buyer for the cheap Saudi crude, but that may not be enough to make up for the demand drop from other major markets India and Europe. Plus, China getting discounted rates in April doesn’t guarantee they will keep buying from the Saudis in the future.

Saudi Arabia’s big oil gamble will hurt the kingdom — but it’ll likely pay off, CNBC, Apr 02