Targeting a stable oil price As a matter of Saudi policy, we would expect a preference for oil market stability over volatility, in line with recent official pronouncements. Although volatility makes it more difficult for high cost unconventional producers to operate, volatility is also damaging for Saudi Arabia and long-term planning domestically. For instance, no budget was announced for 1986 due to uncertainties in the world oil market, with monthly current appropriations set at one-twelfth of estimated actual expenditures for the prior year. We think Saudi authorities view possible eventual sharp upward price spikes in the oil price as damaging to both oil-consuming and oil-producing countries. Future investment decisions will be critical for oil prices Spare capacity is an important policy parameter for Saudi Arabia. In addition to its influence on prices through its ability to adjust production, Saudi can decide on the pace of its reserves development which would potentially affect future supply. There are distinct trade-offs in this decision. If Saudi Arabia is producing at close to its maximum capacity, it will have little control over sharp upside movements in oil prices. If excess capacity is large, oil prices are likely to be under downward pressure. In the near-term, given the uncertainty in the market, in our view, there is likely little incentive for Saudi Arabia to embark on a program to invest and increase capacity from the current level. New investments may still be made to offset declines in existing fields. Over time however, our commodities research medium-term oil balances suggest that Saudi’s spare capacity would be eroded over time unless further increases in spare capacity take place. Our BofAML commodities research medium-term supply-demand balances suggest an increased call on OPEC and need to increase production capacity. In 2004-09, Aramco invested cUS$100bn into its largest-ever capacity expansion program, which increased total capacity