Saudi Arabia's quarterly budget deficit shrank by nearly three-quarters in the second quarter, driven by surging oil prices from the same conflict that battered the Kingdom's oil industry and triggered its steepest economic contraction since the COVID-19 pandemic.

The finance ministry reported a shortfall of 34.3 billion riyals ($9.1 billion) for the three months through June, down sharply from 125.7 billion riyals in the first quarter. Oil revenue climbed 28% compared with the previous quarter as crude prices rose, while government spending declined 3.5%. Oil receipts typically account for the majority of Saudi government revenue, making the Kingdom's fiscal position highly sensitive to swings in crude markets.

The conflict has proven damaging to production yet beneficial to prices. Saudi oil output remains well below prewar levels following Iranian attacks and the closure of the Strait of Hormuz, a chokepoint through which roughly a fifth of global oil supply normally flows, which severely disrupted exports. The oil sector contracted nearly 25% during the quarter, pulling the broader economy down with it.

Saudi Arabia has nevertheless found alternative routes to market. The Kingdom redirected crude through pipelines to the Red Sea port of Yanbu, leveraging its East-West pipeline infrastructure to bypass the Strait and enabling it to command substantially higher prices on reduced volumes. Brent crude was trading near $90 per barrel on Thursday and has risen more than 47% year to date.

The budget, however, remains unbalanced. EFG Hermes estimates that Saudi Arabia now requires oil prices near $115 per barrel to cover expenditure, up from approximately $96 last year. Riyadh spent heavily during the initial weeks of the war, and second-quarter spending was still 11% higher than the same period a year earlier.

The Kingdom has already indicated that certain Vision 2030 projects—the sweeping economic diversification agenda aimed at reducing reliance on oil—may face delays, reductions, or cancellation if financial conditions no longer justify them.

The International Monetary Fund projects that higher prices will more than offset reduced export volumes, narrowing the deficit to 3.7% of GDP this year and 3.1% in 2027.

Saudi Arabia is now producing less oil while earning more per barrel, posting a smaller deficit even as its economy contracts.

By Julianne Geiger for OilPrice.com