Saudi Arabia needs an oil price that allows it to meet its long-term fiscal targets while not incentivizing investment in new sources of energy, according to HSBC researchers.
“Prices may continue to carry a regional risk premium for much of this year but we believe Saudi Arabia would prefer a longer term oil price that meets its financial needs and constrains investment in non-OPEC projects or energy efficiency measures,” Peter Hitchens, an analyst at HSBC in London, wrote in a research note.
Given Saudi increases in production since November, Hitchens believes the Saudis are serious about lowering prices but cautions the bears that “we expect it is wary of deflating what it sees as a speculative bubble too quickly.”
“We believe that $90 a barrel would satisfy both requirements. However, beyond 2014, we believe that the supply demand could tighten increasing upside risks to the oil price,” he added.
The estimate is for Brent crude, which was trading around $114 in morning trade in London Thursday.
Dismissing speculation that Saudi Arabia no longer had the ability move oil prices due to a lack of spare capacity, Hitchens said the oil-rich kingdom has more than enough oil to lower prices further.
“Its production peaked at around 9.5 million barrels per day in the middle of 2008 when unusually strong and counter-seasonal demand for middle distillates tightened the market,” he wrote.
“At that time, the IEA estimated that the Kingdom’s spare capacity was around 1.2 million barrels per day. Since then, we estimate that Saudi Arabia has added around 2.1 million barrels per day to its capacity.”
“Allowing for a five percent decline rate, this would imply total capacity of around 11.7 million barrels per day,” he said.