News Dec 29, 2015 11:47 PM EST

Energy investors hope forecasts by Saudi, Iran to go wrong

By Staff Writer

The Saudi Arabia's budget for 2016 clearly indicates lower oil prices in the days to come. The Kingdom of Saudi Arabia (KSA) budget seems to be based on crude oil price at $29 a barrel. Iran's budget for 2016-17 has been considering the oil price of $40 per barrel.

Energy analysts and investors feel that if the present oversupply situation continues, then the oil price could tumble to $20 a barrel in the near term. Canadian bank BMO warns that "unless there are dramatic changes in the supply picture, oil prices could collapse as low as $20 in the short term. Fundamentally, there's simply too much oil."

The Kingdom's 2016 budget allocations are not a surprise for energy analysts as the undercurrent theme is confirming low price regime for oil. Energy investors hope that the forecasts by Saudi Arabia and Iran may end up well above realistic oil price, as reported by Zero Hedge.

The Saudi Arabia, world's largest oil exporter, has trimmed budget allocations for welfare programs. The defense and security accounted for bigger part of budget allocations, according to Riyadh-based Jadwa Investment Co. 

The Organization of Petroleum Exporting Countries (OPEC) is firm on continuing to exceed 30 million barrels per day target. This will result in further oil price drop and oversupply situation. This implies oil price estimate by energy investors. 

The New York Times reports that pressure on oil price and costly wars in the Middle East are prime reasons for budget cuts for Saudi Arabia. The widening deficit is eroding the Kingdom's financial reserves. The official Saudi news media has reported that Kingdom may adopt new taxes and reduce subsidies on fuel, water and power. 

Saudi Arabia is leading the OPEC group and firm on continuation of production levels to sustain its market share. Saudi Arabia intends to put pressure on the US as shale production is expensive. 

As per a report by Financial Times, the measures by Saudi Arabia such as budget trimming, reforms on subsidies and privatization drive are indicating that there wouldn't be production cuts. Saudi Arabia has $98 billion budget deficit. 

The gasoline price may rise as much as 50 percent in Saudi Arabia, where public transportation doesn't exist. People use mostly cars for transportation and price rise of gasoline will affect consumer savings.

Adding to this, another major oil producer Iran could soon be free to sell oil after the sanctions are lifted. Oil price fell from over $100 a barrel in summer of 2014 to below $37 now. As a result, Saudi Arabia, Russia and Venezuela are witnessing erosion of their reserves. However, oil consuming nations are benefiting from low oil price regime. 

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