What does Saudi spending cut mean for oil?

The primary hypothesis is that falling oil prices forced Saudi Arabia – the most influential member of the OPEC, the latter being still the most influential lobby among the oil-producing industry – to slash public spending. “We have built reserves, cut public debt to near-zero levels and we are now working on cutting unnecessary expenses while focusing on main development projects and on building human resources in the Kingdom,” Saudi Finance Minister Ibrahim Abdulaziz Al-Assaf told CNBC Arabia.

In an apparent move to reduce Saudi Arabia’s dependence on oil exports in line with recent IMF advice, the Kingdom might actually be continuing its low oil prices strategy in the long term – the barrel dropped from $115 in June 2014 to $42 in recent days. Indeed, cutting public spending doesn’t necessarily means Saudi Arabia is willing to reverse the trend but could rather be optimizing its public finances with a view to sustaining low oil prices for a longer period of time than expected. The longer the current situation exists, the likelier Saudi Arabia is able to overwhelm foreign competition.