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Crunch time for GCC economies’ oil price dilemma

COVID-19 is staying mobile and agile while keeping businesses grounded. And in doing so, crude prices are slumping again, and for oil-producing countries in the GCC, this needs to change and quick

OPEC has reduced its own demand forecast by 500,000 barrels Oil dropped to near $40 a barrel after briefly climbing above $43 in late August S&P estimated that GCC central government deficits will reach about $490 billion cumulatively between 2020 and 2023

COVID-19 is staying mobile and agile while keeping businesses grounded. And in doing so, crude prices are slumping again, and for oil-producing countries in the GCC, this needs to change and quick. 

Demand falling

Oil producers could be set for another showdown before the end of the year, with heavyweights Saudi Arabia and Russia holding different views on how to approach the halting recovery in oil demand.

The OPEC+ group of oil producers cut production by a record 9.7 million barrels a day in May, and has been scaled back to 7.7 million b/d from August through the end of the year and will relax even further to 5.8 million b/d from January 2021 through April 2022.

The International Energy Agency (IEA) and OPEC have both resumed cutting their demand forecasts for this year. In the past two months, the IEA has trimmed its forecast by 400,000 barrels a day, while OPEC has reduced its own forecast by 500,000 barrels. And they may fall even further.  

Europe is advising people to work from home more, socialize less and economic support measures are lessening. In the US, the Coronavirus Aid, Relief, and Economic Security Act is coming to an end on September 30. 

Saudi wants to prevent a slide for oil prices. 

Read: Grand post-COVID-19 plans for GCC SMEs meet austere reality

Prices dipping

Oil dropped to near $40 a barrel after briefly climbing above $43 in late August as Libyan output surged after a blockade on energy facilities was partially lifted.

Libya’s output has almost tripled to 250,000 barrels a day and set to increase as its storage tanks unload their capacities on ships.

Russia’s Energy Minister Alexander Novak estimated on Sunday that global oil demand in 2020 will decline by as much as 10% from a year earlier.

Engulfed in crisis

Gulf economies and their reliance on oil are in an unenviable position economically.

S&P Global Ratings has estimated that GCC central government deficits will reach about $490 billion cumulatively between 2020 and 2023 while government debt will surge by a record-high $100 bn in the current year.

The IMF has estimated that Saudi needs oil prices at $76 to achieve fiscal breakeven in the current year with the current oil price leaving the country with a budget deficit of 11.4% of GDP. Oil accounts for roughly 87% of Saudi budget revenues, 90% of export earnings, and 42% of GDP.

The Saudi Arabian Monetary Authority (SAMA), the kingdom’s central bank, has unveiled nearly $27 billion in stimulus packages to support its banking system.

In the current financial year, the United Arab Emirates (UAE) has a fiscal breakeven oil price of $69/barrel. Although having one of the most diversified economies in the region, the UAE remains extremely reliant on oil, with the exception of Dubai. It is the world’s 8th largest oil producer, pumping 3.1 million bpd with oil exports accounting for about 30% of GDP.

Kuwait’s breakeven oil is $61 while Bahrain and Oman need oil prices of $95 and $86, respectively, to balance their books.

Oman pumps a million barrels of crude per day, making it the world’s 19th largest producer, contributing for 68% of its GDP and 85% of government revenues. The country is expected to record one of the biggest budget deficits in the current financial year at nearly 20% of GDP.

GCC countries have been pretty successful locking-in long-term, low-rate debt in the recent past, having already raised nearly $50 billion in the international debt markets in the current year.

Read: Dubai-Saudi trade very healthy despite endemic economic challenges

Good news ahead

The GCC has low levels of government indebtedness are 39% in Kuwait, 15% in Saudi Arabia, and 13% in Abu Dhabi.

The IMF is projecting a GCC growth of 2.5% in 2021.

A report from global research giant Frost & Sullivan highlights ‘megatrends’ that are expected to shape a more diversified GCC economic future. It claims the internet is expected to account for 5% of GDP by 2030, up from 4.1% in 2018, with all six states expected to launch 5G mobile services by the end of 2020.

The report noted that 250 fintech start-ups are operating across the GCC, with regional activities projected to expand by 50% over the next five years. 

Also, the cumulative installed generation capacity for renewable energy across the GCC is expected to reach 72,300 MW by 2030, helping reduce the energy bill.