Iran war could reduce Saudi budget deficit

• Conflict pushes up oil price
• Export flows will determine deficit
• Depends on Abqaiq-Yanbu pipeline

The surge in oil prices triggered by the Iran war could ease pressure on Saudi Arabia’s budget deficit if Aramco maintains export flows, but analysts warn the conflict has introduced too much uncertainty, making it difficult to gauge the impact.

Brent crude hit four-year highs on Monday, at almost $120 a barrel, before settling closer to $105 later in the day. Oil is comfortably above Saudi Arabia’s breakeven price of $87 – the level needed to balance the government’s budget as estimated by the International Monetary Fund. 

“The budget depends on both oil prices and oil production,” said Tim Callen, a former IMF mission chief to Saudi Arabia. “As exports are hit by shipping difficulties, this will impact production. Ultimately the price up versus production down will determine the impact.”

The Saudi Finance Ministry had pencilled in a fiscal deficit of 3.3 percent for 2026, although independent analysts had suggested the ultimate figure could be close to double that, when oil was forecast to sell for $60 a barrel this year.

The prospect of higher oil prices and therefore revenues could provide an opportunity to shrink a deficit that widened to record levels last year, assuming Saudi Arabia is able to withstand the near blockade of the Strait of Hormuz and continue selling oil.

The ability to maintain exports depends on the east-west Abqaiq-Yanbu pipeline, which allows crude to bypass the Gulf and reach Red Sea terminals, but remains largely untested.

The pipeline, which has a proven capacity of 5 million barrels a day (bpd), was expanded last year to carry 7 million bpd. There are doubts, however, over the pipeline’s ability to carry such oil quantities.

“Certainly if they can export 7 million bpd, the fiscal position is set to strengthen,” said Monica Malik, chief economist at Abu Dhabi Commercial Bank (ADCB). “But so far the data that’s available on tanker movements from last week is much lower than 7 million.”

Aramco, which is about to release its full-year 2025 results, has not yet commented on the pipeline’s activities, but analysts are sceptical that the oil flowing out of Yanbu is proving to be equal to the lost exports from Hormuz.

Data compiled from Bloomberg suggests that the amount of daily exports leaving Yanbu is triple the amount from February. 

It suggests an increase in oil flows to the Red Sea, but not enough to offset the roughly 6 million bpd that flowed through the Strait of Hormuz from Saudi Arabia last year.

Data from intelligence company Kayrros suggests that Saudi Arabia has already reduced oil production in response to the crisis.

“Yanbu can’t really do it at the moment,” said Kate Dourian, non-resident fellow at the Arab Gulf States Institute and a fellow at the Energy Institute. “Maybe you can get two million barrels out a day. Maybe three.”

Kayrros estimates its export capacity through Yanbu terminals at 4.4 million bpd. It said in a note that “production will likely ramp back up once all the needed tankers line up at Yanbu terminals … but it will take some time for all the needed tankers to arrive”.

Other factors that would allow Saudi Arabia to export include reopening of the Strait of Hormuz, either through intervention or the conflict coming to an end.

If this were to happen, analysts expect prices to fall but be sticky on the way down. 

“You would see a fall, but probably not to where it was before,” said Malik. “You would have a higher geopolitical premium. And where you have had shutdowns, that’s going to take maybe a month or so to resume fully and start up again.”

Given the number of factors that remain uncertain, ADCB has said it has not adjusted its fiscal outlook for Saudi Arabia.  

“We’ve done so many permutations and combinations on whether the Red Sea will have any attacks, this, that, and the other, and where oil prices settle down,” said Malik. “It’s just impossible to say. It’s such a fluid situation.”

Other issues associated with the war are also difficult to account for, according to Rachel Ziemba, founder of consultancy Ziemba Insights. It is not yet clear what spending will be needed for repairs or loss of business elsewhere, which could affect revenues.

“The fact KSA can sell at higher levels the lower volumes though the east-west pipeline is a support”, she said. “But ultimately volumes are down and disrupted and other spending needs are likely up.”