On Friday, on the way to diving into Goldman’s $20 crude call, we recapped our characterization of low crude prices as a battle between the Fed and the Saudis, a battle which is now manifesting itself in budget troubles in Riyadh and a concurrent FX reserve burn. Here’s what we said:

When Saudi Arabia killed the petrodollar late last year in a bid to bankrupt the US shale space and secure a bit of leverage over the Russians, the kingdom may or may not have fully understood the power of ZIRP and the implications that power had for struggling US producers. Thanks to the fact that ultra accommodative Fed policy has left capital markets wide open, the US shale space has managed to stay in business far longer than would otherwise have been possible in the face of slumping crude. That’s bad news for the Saudis who, after burning through tens of billions in FX reserves to help plug a yawning budget gap, have now resorted to tapping the very same accommodative debt markets that are keeping their competition in business as a fiscal deficit on the order of 20% of GDP looms large.

Still, as we went on to point out, it looks like the Saudis have dug in for the long haul here and the strain on non-OPEC production is starting to show as the IEA now says “the latest tumble in the price of oil is expected to cut non-OPEC supply in 2016 by nearly 0.5 million barrels per day (mb/d) – the biggest decline in more than two decades, as lower output in the United States, Russia and North Sea is expected to drop overall non-OPEC production to 57.7 mb/d.” 

“US light tight oil, the driver of US growth, is forecast to shrink by 0.4 mb/d next year,” the agency adds.

Still, the Saudis know that the war is still far from won, which again is why the kingdom is now borrowing to supplement the use of their petrodollar reserves. But as we’ve documented in great detail, the Saudis face a unique set of challenges when it comes to managing fiscal spending. The cost of maintaining the average Saudi’s lifestyle as well as the cost of financing one (and soon two) proxy wars translates to a tremendous amount of budget pressure. Add in defending the riyal peg and you have yourself a problem. So even as the Saudis have ample room to borrow (debt-to-GDP is negligible at present), Riyadh would rather US production fold sooner rather than later and with the next round of revolver raids coming up in October, and with the bond market set to cast a wary eye towards HY going forward, the kingdom just might get its wish. Citi has more on shale’s “dirty little secret”: