Stronger oil, key reforms bolster outlook for GCC

Dubai - Experts expect that oil markets will move into a 0.8 million bpd deficit in first half 2017

Prospects of a stronger oil price and evidence that reforms in the major regional economies, particularly in the GCC, are leading to higher revenues and controlled spending, augur well for the Middle East outlook, investment experts said.
As 2017 progresses, there should be better news on the oil price with the delays and cancellations of oil and gas projects starting to weigh on supply growth which in turn should lead to a firming of crude prices, said Gary Dugan, Chief Investment Officer - Wealth Management at Emirates NBD.
An estimated $380 billion worth of oil and gas projects have been cancelled since 2014. The cancellations will lead to dramatically lower oil production in the years ahead. An estimated $170 billion in capex spending was slashed for the period between 2016 and 2020, according to Wood Mackenzie.
The downturn in oil prices had hit projects all around the world, and Wood Mackenzie says that 68 major projects were scrapped in 2015, which account for around 27 billion barrels of oil and natural gas.
Oil prices, which shot to their highest levels since mid-2015 on Monday after Opec and other producers reached their first deal since 2001 to jointly reduce output in order to rein in oversupply and prop up markets, are forecast to hit $70 per barrel in 2017. Brent crude, the international benchmark for oil prices, soared to $57.89 per barrel in overnight trading between Sunday and Monday, the highest level since July 2015.
Analysts said combined output cuts of 1.758 million barrels a day are implemented at the start of 2017, oil markets will shift from surplus into deficit. Given the cuts in production announced by Opec, experts expect that markets will move into a 0.8 million bpd deficit in first half 2017.
Analyst Neil Beveridge expects that by the second half of 2017, the deficit could be substantial with a supply deficit of over one million barrels per day. "We expect significant cut in inventories going forward, which will put upward pressure on oil prices. Given the undersupply which will exist in the market from the start of 2017 onwards, we see at $60/bbl as a realistic target for 2017 and US$70/bbl for 2018."
Globally, while 2017 will in all likelihood start with a lot of hope and promise, the disruptions to conventional wisdom are unlikely to abate, Dugan said in Emirates NBD's global investment outlook for 2017.
"We believe that 2017 may be a year of two halves. In the first instance, the year starts with lots of positivity but there is the risk that things may start to change as the year progresses. However, the good news is that although the focus of the mostly positive outlook has largely been in the US, other parts of the world have also seen better economic data of late. European industrial and consumer confidence have been rising in recent months and in Japan, there is a more consistent pattern of improving macro data flow. In conclusion, let's enjoy the good news and hope that it finds momentum to rebuild confidence through the year," said Dugan.
Speaking at a media briefing, Dugan said 2016 has proven to be a year where the global economy has seen many a disruption and challenge to perceived conventional wisdom. "On the political front, Brexit and Donald Trump's victory were major surprises to the financial markets and precipitated significant shifts in the valuations of currencies and asset classes. Technology has continued to disrupt industries with such things as driverless cars and robots now seen as much closer to the norm rather than the aspiration."
On dollar, Dugan said in the first part of 2017, it is hard to bet against the greenback given a very high probability of higher rates and at the very least a perception that US growth will lead the developed countries. The euro, in particular, faces downside risk from the calendar of important elections that could deliver significant protest votes. Emerging market currencies remain vulnerable until Donald Trump sets out a clear vision on if and when he puts in place protectionist measures against countries such as China.
Gold has ended the year on a soft note and may remain subdued in the early months of 2017. "However, we would remind investors that gold is a store of long-term value and an insurance policy against untoward events."
Dugan said investors should see periods of marked weakness in the gold price as a buying opportunity. "Gold is believed to offer some protection against inflation scares and protect investors against significant financial market and geopolitical upset. We continue to advise investors to build holdings in gold as a risk hedge."
- issacjohn@khaleejtimes.com