Oil in Global Economy Series: Why Saudi Arabia desperately wants supply deal to continue?

In November 2016, Saudi Arabia led Organization of Petroleum Exporting Countries (OPEC) and Russia led 10 non-OPEC countries forged an alliance to curb on oil supplies to the tune of 1.76 million barrels per day.

If you have missed some of the details, do note,

• 11 member OPEC cartel bore the biggest brunt of the cut to the tune of 1.2 million barrels per day, while 10 non-OPEC countries led by Russia only promised less than 0.6 million barrels per day.
• In addition to that, Russia was given 6 months to reach the compliant level, while OPEC producers began from month one.
• 2nd biggest oil producer in the world, Saudi Arabia shouldered the biggest cut to the 0.486 million barrels per day, while the biggest producer Russia only shouldered 0.3 million barrels per day.
• Moreover, according to latest data, while the OPEC compliance has hit more than 120 percent, non-OPEC compliance hovering in the 80s as of January 2018.
• Saudi Arabia, since the beginning, has cut much more than it has promised to do.

The above points show that Saudi Arabia is somewhat desperate when it comes to continuing with the agreement. In recent months, it has also aggressively defended the supply pact and even suggested that the pact might continue even if the markets suffer a shortage.

Why Saudi Arabia so desperate?

• Since 2014, when the oil price started declining, Saudi Arabia has been posting budget deficits, which grew to staggering 14.8 percent in 2015 and was 8.9 percent in 2017.
• The Kingdom is fighting several costly wars most notably in Yemen as wants to counter its regional arch-rival Iran, which has a much lower fiscally breakeven oil prices than the kingdom.
• Since the oil price crash, Saudi Arabia has reigned over its budget has tried to reduce its fiscal break-even oil price but according to U.S. Federal Reserve’s data, the fiscal break-even price has remained as high as $79 per barrel in 2016. Unconfirmed reports suggest that the breakeven price has declined further in 2017 but still remains above $70 per barrel, which is higher than the current price of $67 per barrel (Brent).
• More importantly, Saudi Arabia desperately needs higher oil price as it plans to float 5 percent stake in state-owned oil giant Saudi Aramco. A higher oil price needed for improved valuations.