Oil producers to carry on spending, but warily

By Simon Webb - Analysis

DUBAI (Reuters) - A deep drop in oil prices has sapped the confidence of producer nations as even top exporter Saudi Arabia faces the prospect of a financial deficit next year.

But they are still expected to carry on spending for as long as possible and the core Gulf producers can draw on healthy cash reserves accumulated during the price boom.

International benchmark U.S. crude has lost around two-thirds of its value since hitting an all-time high of $147.27 in July and many are predicting the price will stay low because global economic weakness has choked off fuel demand.

"Depending on where prices stabilize you will see a deterioration in current accounts, moderation in spending growth and restructuring of projects," said Monica Malik, economist at EFG-Hermes in Dubai.

"But Gulf states are in a much better position than other oil exporting countries as they were so much more cautious on expanding spending when the price was on the way up."

OPEC members face a double hit as their finances have been eroded by a fall in volume as well as in value.

To match depleted demand and to try to stave off any further price collapse, the Organization of the Petroleum Exporting Countries meets this weekend in Cairo for an informal debate on how much more oil it needs to remove from the world market.

Citigroup economist Mustaq Khan said that if oil averaged $50 next year, Saudi Arabia's external deficit could reach more than a quarter of its gross domestic product (GDP) and even oil at $75 would leave it with only a small surplus.