The trend we flagged in November of 2014 continues unabated.
When the Saudis moved to artificially suppress crude prices in an effort to preserve market share by bankrupting the cash flow negative US shale space, Riyadh was gambling.
Gambling on how long US producers could rely on wide open capital markets to keep them afloat. Gambling on how tolerant everyday Saudis would be should it become necessary to cut subsidies to shore up the budget. Gambling on the extent to which the market would test the riyal peg. And on and on.
In short, the kingdom was betting that it could ride out the price storm without essentially going bankrupt. But the downturn has lasted longer than the Saudis might have expected, and now that some 1,000,000 b/d of Iranian supply is set to come back online by year end, Riyadh has to a certain extent lost its ability to control the situation.
Complicating matters is the war in Yemen, which next month will drag into its second year. Not only has the conflict been costly, it's also put Riyadh in a bad spot from a reputational perspective. Last week, the European Parliament recommended a wholesale embargo on arms sales to the Saudis in light of the 3,000 civilians the kingdom has "accidentally" killed over the course of the campaign to rout the Iran-backed Houthis.
All of this costs money. Lots of it. The war, the 16% budget deficit, maintaining the riyal peg - it's all costly and it's showing up in the depletion of Saudi reserves which in January fell 2.4%, or $14.3 billion, falling below $600 billion for the first time since the summer of 2012.
Last month was the third month in a row that the SAMA reserve drawdown topped $10 billion.
Why should you care? Well, that depends on who you are. For markets, this is a perpetual liquidity drain. The Saudis are no longer net exporters of capital, which means the country is noa drag on global liquidity rather than a boon. That's a fancy way of saying this: the SAMA drain is just QE in reverse. When SAMA falls, it amounts to monetary tightening. The same is true of selling by other SWFs which, as we documented earlier this month, may be set to extract up to a half trillion from global equity markets in 2016.
Here's a look at the drawdown and as you can see, this is getting serious - fast.
It may appear as though that stash will hold up, but just like Beijing, Riyadh is going to discover that these reserves evaporate rather quickly in times of stress.
Don't be surprised when the chart shown above goes parabolic - in the wrong direction. And at that point it will be do or die time. Either cut production and rescue the budget and ditch the riyal peg, or go broke. Stay tuned, because this year's red ink is projected at 13% - and that's assuming there's no intervention in Syria.