Saudi Arabia is facing serious liquidity issues that will have a profound effect on British oil and gas contractors operating in the Middle Eastern kingdom.
With capital leaching out of the country, stress in its banking system, and a reduction in its money supply, the country is witnessing a steep hike in its three-month interbank rates. It is the highest since the 2008 Lehman crisis.
If reports are to be believed, the Saudi Government is set to pay its oil and gas contractors with tradable IOUs. This is a sign of the serious financial crunch that the country is facing.
The currency team from Societe Generale is advising its clients to short the Saudi riyal, as it believes that the country will be forced to stop its dollar peg. Should this happen, the world will witness a relentless global competition for a share in the oil markets.
Experts from Bank of America believe that the fall in the dollar peg may result in the oil prices crashing to $25 (around £17) a barrel. Saudi Arabia’s foreign oil reserves are falling by £6.9 billion a month, even though the country has switched to syndicated loans and bond sales with the aim to stem its massive budget deficit.
Saudi Arabia has reserves of $582 billion, which may be sufficient as long as the funds are liquid. However, that does not seem to be the case at the moment, and the country’s central bank is tightening its monetary policy.
The prices of crude have increased 80 per cent to nearly $50 (around £34) a barrel since the middle of February. However, that is not sufficient to ease the financial crunch that Saudi Arabia is experiencing. With the dollar increasing and Canada set to go back to producing 1.2 million barrels a day, experts from BNP Paribas feel that there will be a glut in the global oil inventory, and supply outages will be imminent and permanent.