Gulf states may opt for fiscal austerity as oil slips to $30

STRUGGLING TIME: The steep fall in prices came in the wake of an unprecedented travel ban between the US and Europe even as Opec+ members failed to reach an agreement to deepen oil production cuts in response to lackluster demand. - Reuters

The current account and budget positions of Gulf oil exporters will soon be pushed to a deficit as crude prices crashed to the lowest level since 2015 with the biggest one day drop since the 1991 Gulf War, analysts said.
The steep fall in prices, currently hovering above $30 after declining 50 per cent from year's peak, came in the wake of an unprecedented travel ban between the United States and Europe even as Opec+ members failed to reach an agreement to deepen oil production cuts in response to lackluster demand trends.
Market analysts describe it as a nightmare scenario for the oil market. Crude dropped to as low as $30.02 a barrel on Thursday. At that level, it was down 27 per cent for the week. The travel ban is only intensifying fears in the oil patch about demand destruction for energy products.
Analysts at Kamco Invest said the current events in the oil market came as a double blow for oil fundamentals as this time the decline prices was triggered by declining demand as well as an increase in crude oil production.
"The slowdown in oil demand was led by the rapid spread of the coronavirus outside of China that has triggered a global response in order to contain the situation. A majority of these measures came in the form of a curb in travel and restriction on the movement of goods and services; however, a few steps also focused on providing a stimulus that led to a temporary rebound in the economy as well as crude prices," they said.
William Jackson, chief emerging markets economist at Capital Economics, said the sharp fall in oil prices would push current account and budget positions into deficit across the Gulf, but these can be financed from large savings for some time.
"Dollar pegs should stay intact and the Gulf won't backtrack on plans to raise output. That said, fiscal austerity is likely to be stepped up, and growth in non-oil sectors will be weaker than we had previously thought both this year and next."
"By our estimates, oil exports will decline by seven per cent to 15 per cent of GDP. The immediate effect is that current account positions will worsen - all the Gulf economies will run deficits," said Jackson.
James Swanston, Mena Economist at Capital Economics, said Saudi oil policy seems to have shifted away from cutting output to prop up prices and towards regaining lost market share. "It's not altogether clear what lies behind this shift in strategy. But the Saudi authorities had become increasingly frustrated with other oil producers' lack of compliance under previous deals to cut output and with Saudi Arabia's loss of market share to US shale producers."
According to Bloomberg, the US travel ban would affect 180,000 barrels per day or four per cent of global aviation fuel demand. Domestic oil demand also took a hit with restricted movement of people within a majority of the affected countries.
Meanwhile, post rate cuts by the US Fed and BoE, the US government is working on a payroll tax relief to support economic growth and increase disposable income, in addition to plans for providing emergency capital to small businesses. In view of the new realities facing the oil market, Opec, in its latest monthly report, slashed oil demand forecast for 2020 by 920,000 barrels per day and now expects flattish demand growth of merely 60,000 barrels per day as compared to 2019.
Meanwhile, the IEA said it expects the first yearly drop in oil demand in 2020 since the 2009 financial crisis. The agency lowered its forecast for oil demand by 1.1 million barrels per day and now expects a decline of 90,000 barrels per day in oil requirements in 2020. On the other hand, the US EIA forecast the most optimistic of the demand expectations with an estimated growth of 0.37 million barrels per day in 2020, Kamco analysts said.
On the supply front, Saudi Arabia is said to looking at raising oil output to more than 12 million barrels per day and a similar move was reported by the UAE, which said it is positioned to increase production to 4 million barrels per day in April-2020.
"In terms of capacity, Saudi Arabia is accelerating its capacity build-up from 12 million barrels per day to 13 million barrels per day. On the other hand, Russia can see a potential increase of as much as 0.5 million barrels per day. Based on February 2020 production data, Opec had spare capacity of 6.1 million barrels per day with Saudi Arabia, Kuwait and the UAE accounting for 42 per cent of this based on their existing capacities," Kamco said. - issacjohn@khaleejtimes.com