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Oil prices to $30? An early notice for GCC countries to heed IMF warning

Are we going through an oil market crash again, four years after a glut-induced one?

Oil prices fell back again on Friday, with WTI declining to $50 and Brent dipping below $55 A pandemic and a whole host of scenarios could play out in tandem to drive the oil price down below $30 per barrel levels Chinese oil demand from a current average of 14 million could see it likely be lower by 18% to 25%

Plans by OPEC+ to agree to deeper production cuts by some 600 barrels per day (bpd) is stalled. Russia is asking for more time to go for it. 

Meanwhile, the coronavirus continues to wreak havoc with oil and gas markets and drive oil prices down.

Oil prices fell back again on Friday, with WTI declining to $50 and Brent dipping below $55.

Image Courtesy of OilPrice.comRead: Oil prices are crashing but wait…Libya has something to say about that

Murky oil picture

Oil prices were on course for the longest run of weekly declines since November 2018, according to Bloomberg estimates.  

According to OilPrice.com, the deadly coronavirus is causing oil demand disruption and travel restrictions with thousands of canceled flights to, from, and within China.

According to estimates from IHS Markit, the virus outbreak is set to knock out at least 1.7 million barrels per day (bpd) of refinery runs in China in February, compared to an otherwise projected growth of 760,000 bpd.

Exclusive: Latest bump higher for Oil prices not scheduled to last

 Is $30 on the horizon?

Forbes says that a pandemic and a whole host of scenarios could play out in tandem to drive the oil price down below $30 per barrel levels. Similar levels were reached in January 2016 when Shale and OPEC were at full blast and create a glut. Since then, ‘OPEC+’ cut 1.7 million bpd of production out of the global supply pool.

Now, it’s a different story,

First off, Chinese oil demand from a current average of 14 million could see it likely be lower by 18% to 25% according to industry surveys or around 3 million bpd less. 

This isn’t mentioning a knock-on effect due to the pandemic spreading to over 20 countries meaning flight restrictions and lower calls on jet fuel. 

Oil has fallen 20% of its peak “this year”,  peaking past $70 in Brent’s case following the Us killingIranian General Qasem Soleimani in an American airstrike

Demand growth expectations for 2020 were in the range of 800,000 bpd to 1.4 million bpd, before the virus outbreak.

BP estimates that global demand growth could be 300,000-500,000 bpd lower (lower by 1/3) than its internal 2020 projection of 1.2 million bpd.  

Finally, low oil price will cripple supply especially with shale producers. Overall non-OPEC production could come in anywhere between 2.1-2.3 million bpd, with barrels not just from the U.S. but Brazil, Canada, Guyana and Norway as well.  

Read: Markets steady; OPEC agree to deeper cuts

Gulf’s financial wealth on the brink?

The International Monetary Fund (IMF) said on Thursday Gulf Arab states could see their financial wealth depleted in the next 15 years amid lower hydrocarbon revenues if they don’t step up fiscal reforms, Reuters reported.

The news of faltering oil prices could signal that this reality may happen even before that.

The six-nation Gulf Cooperation Council (GCC), whose net financial wealth the IMF estimates at $2 trillion, accounts for over one fifth of global oil supply. 

The IMF said: “At the current fiscal stance, the region’s existing financial wealth could be depleted in the next 15 years.” 

It added global oil demand could peak by around 2040 or much sooner in case of a stronger regulatory push for environmental protection and energy efficiency.

“All GCC countries have recognized the lasting nature of their challenge … However, the expected speed and size of these consolidations in most countries may not be sufficient to stabilize their wealth.”

The IMF said the introduction of VAT and excise taxes was positive: “There is significant potential to build on this progress.”

“As the region transitions toward a non-hydrocarbon economy, moving from wide-ranging fees toward fewer broad-based taxes, for example, could provide much-needed revenue diversification.”

Kuwait – which has one of the world’s biggest sovereign funds – could need some $180 billion in financing over the next six years in the absence of more drastic fiscal measures, the IMF said last month.

Saudi Arabia, the Arab world’s largest economy and the world’s largest crude exporter, expects a deficit of $50 billion this year, up from $35 billion in 2019, Reuters reported.