Zach Schreiber, the hedge fund manager and CEO of PointState Capital, has declared that Saudi Arabia has reached the end of its bull market.
Saudi Arabia’s economy is weak
Zach Schreiber has stated that he is going short on the Saudi Riyal and long on the US dollar, Mexican peso, and Russian ruble.
This shortcoming comes as a result of Saudi Arabia’s economy relying heavily on oil prices. As it currently stands oil is currently down $44 per barrel compared to a few years ago when it was $100. To break even the Saudi oil industry would require prices to rise to $90 per barrel.
The reasons for lowering of oil prices –
- The US dollar – the US dollar is presently at a 12 year high against the euro, when the US dollar is strong this leads to a fall in the value of commodities, this is due to global commodity prices being in US dollars
- OPEC – the Organisation of the Petroleum Exporting Countries has yet to take any steps to steady the oil markets
- Crude oil oversupply – The demand for oil is decreasing at the same rate supply for oil is increasing, this has caused an unbalance in supply and demand, the decline of the request has been blamed on vehicles becoming more efficient and the economies of developing countries becoming weaker
- Nuclear deal with Iran – The Iran nuclear deal is an initial framework agreement between Iran and various world powers, the structure will resign Iran’s nuclear facilities; there are fears this deal will add to the oversupply in the market due to the deal allowing more oil exports
Saudi Arabia social makeup is changing. Spending needs for the country are increasing at a time when a large percentage of the younger population will resist any attempts at fiscal austerity.
— The Capitalist (@Capitalist_Site) April 28, 2016
Why falling oil prices can be good
Falling oil prices mainly benefit the consumer since the cost of heating and transport decreases which is suitable for living and business costs. If businesses and individuals are spending less on transportation and heating, these savings can go towards profits or disposable income.
The combination of lower prices, lower business costs, and the increase in spending can help stimulate economic growth.
Lower oil prices also contribute to keeping central bank interest rates low. The fall in prices reduces inflation; this means that the central bank is able to keep interest rates lower without risking headline inflation.
Why falling oil prices can be a terrible situation
A drop in oil prices may appear to be a good thing, but there is also a wider downside.
Falling oil prices put immense pressure on oil companies. We have a situation at the moment where oil prices are causing economic hardship for the oil industry which is putting oil companies out of business. Oil firms are now in a position where they have to cut costs.
A knock on effect of oil companies going bankrupt is investors start to see the oil industry as a risky investment; this leads to investments drying up. This, in turn, then affects banks that have offered money for investment; they are now set to lose money from nonpayments. The result of this is a global tightening of credit.
A small drop in prices, of course, wouldn’t cause this much disruption. However, there has been a significant decrease in oil prices.
The overall problem isn’t so much the drop in oil price itself, but rather a drop in prices falling to such a low level that is causing oil production to become uneconomical.
This is why Saudi Arabia has been significantly affected by the decline in oil prices.
Will oil prices recover?
The change in rates is not the first situations where the charges plunged, and it most likely will not be the last.
In the 1970s and 1980s the oil companies were fronted with a same issue as of today. The introduction of OPEC non-oil producers surged the oil supplies which caused prices to decrease. In 1986, Oil prices dropped as low as $12.
OPEC responded to this by cutting production; oil production was then increased at a later date. Oil prices began to stabilize almost a decade later. The current drop in prices has created a similar pattern of low prices over an extended period; so far the oil industry witnessed a drop in their prices to up to 57% in comparison to the previous year.
Analysts believe that oil prices may start to surge up in 2017 due to signs of oil production starting to decrease which should then increase demand.
It is unclear however if this rise will come to prevent Saudi Arabia from collapse in time.
In the mean time the US, Mexican, and Russian economies have improved despite the current crisis. This improved economy is why the dollar, the peso, and the ruble currency are currently being considered strong against the riyal currency.