 "Saudis face 'critical' choice: Cut oil supply or drop riyal peg?")
The longer oil languishes, the more pressure builds on Saudi Arabia to abandon its currency peg.
Contracts used to speculate on the riyal's exchange rate in the next 12 months climbed to a 13-year high on Thursday, before trimming the increase a day later, according to data compiled by Bloomberg. Six-month agreements rose to near the highest in seven years on Friday.
Saudi Arabia is pumping record amounts of oil this year, leading OPEC's effort to defend market share even as Brent crude trades near the lowest level in six years. The slide in oil revenue has forced the kingdom to tap savings and sell debt to preserve its 30-year-old peg to the dollar, and for Bank of America Corp, that may mean the country faces a "critical" choice next year: either cut production to help boost prices or adjust the riyal's rate to stem the decline in foreign reserves.
"A depeg of the Saudi riyal is our number one black-swan event for the global oil market in 2016, a highly unlikely but highly impactful risk," Bank of America strategists led by Francisco Blanch in New York wrote in a November 19 report. "It is a lot easier politically to implement a modest supply cut at first than allow for a full-blown currency devaluation."
One-year forward points for the riyal jumped 167.5 points to 525 on Thursday, before falling to 455 a day later. That reflects expectations for the currency to weaken about 1.2 percent to 3.7962 per dollar in the next 12 months. Six-month agreements rose on Friday to 152.5, near the highest level since 2008.
Weaker global growth and inflation as well as the strength of the dollar will remain "huge" headwinds for dollar-based commodity prices, Bank of America said. Brent crude, the benchmark for more than half the world's oil, closed last week at $44.66 per barrel, down 44 percent from a year earlier.
Still, Saudi Arabia's reserves are hardly depleted. Though net foreign assets fell to a near three-year low in September as the government drew down financial reserves accumulated over the past decade, they're among the highest in the region at $646.9 billion. The country's peg survived lower oil prices in the 1990s and revaluation pressure resulting from surging prices in the late 2000s, Shaun Osborne, the Toronto-based chief foreign-exchange strategist for Scotiabank, wrote last week.
Pressure may also build on the Chinese yuan as reserves at central banks across the world decline against a backdrop of looming U.S. interest-rate increases, Bank of America said. A slump in the yuan may ultimately force Saudi Arabia's hand because of the "very high sensitivity" of commodities to the currency, the bank said.
