Murky crude horizon

Updated 26 Jul 2020

Email

The outlook for consumption does not appear any better in Europe, with Finnish refiner Neste Oyj predicting demand for oil products to remain “severely reduced” in the third quarter. — AFP/File
The outlook for consumption does not appear any better in Europe, with Finnish refiner Neste Oyj predicting demand for oil products to remain “severely reduced” in the third quarter. — AFP/File

OIL is not out of wood yet and this is carrying serious ramifications for major oil producers.

Demand recovery is under focus. Fears of a second wave of Covid-19 pandemic in countries around the world continue to impact global markets.

In the US — the world’s largest economy — jobless claims rose last week for the first time since March. With measures to contain the virus keeping drivers off the road, recent data is showing gasoline demand edging even lower.

In South Korea — one of the larger consumers of petroleum in the world — the economy has taken a significant hit. With exports plummeting, courtesy the pandemic, the country seems to be sliding into recession.

In the meantime, as per Bloomberg, Chinese consumption is also cooling while derivatives that help value North Sea grades is showing renewed weakness.

The outlook for consumption does not appear any better in Europe, with Finnish refiner Neste Oyj predicting demand for oil products to remain “severely reduced” in the third quarter.

Consequently, most oil producers are faced with a grim scenario.

Despite the unprecedented recent output cuts by the producers, crude continues to trade around $40 a barrel. CMarkits latest forecast sees an average price of $43 for Brent in July that may rise to $50 by December if demand continues to smoothly recover. That is a big if. Morgan Stanley had also raised its forecast for Brent by $5 to $40 in the third quarter.

Yet, this is not enough, especially for the single product economies of the Arabian Gulf. To get going, these economies are almost fully dependent on oil income. Saudi Arabia’s Energy Minister Prince Abdulaziz bin Salman has been vocal in highlighting that although the Organisation of Petroleum Exporting Countries (Opec) does not have a price target, yet the current prices are not sustainable in the longer term.

The International Monetary Fund says the crude price plunge and the production cuts would hit oil exporters in the Middle East and North Africa hard, with the combined oil income for those countries expected to plummet by US$270 billion this year compared to 2019.

The six countries of the Gulf Cooperation Council — Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates — are set to accumulate as much as $490bn in combined government deficits between 2020 and 2023, S&P Global Ratings reported.

In order to narrow the budgetary deficit, Saudi Arabia has announced tripling its value-added tax. As part of a new round of painful austerity measures to save its finances, Riyadh has also announced suspending the cost-of-living allowances for its employees.

The measures undertaken also include canceling, extending, or postponing some operational and capital expenditures of government agencies, as well as reducing provisions for a number of programmes and major projects this year. As per the Saudi finance ministry, through such measures, the country is targeting to save $26.6bn.

In order to raise additionally required money, Saudi Arabia is also planning to put up state-held assets in healthcare, education, and water utility sectors for privatisation. Saudi Arabia could receive billions from such privatisations over the next five years, the Kingdom’s finance minister Mohammad Aljadaan said at a video forum hosted by Bloomberg.

Kuwait — one of the world’s wealthiest countries — is also faced with a severe budget crunch. Running a deficit that could reach 40 per cent of its economy this year, the Kuwaiti finance ministry is now seeking permission from the parliament to permit it to issue debt of as much as $65bn.

In order to meet the yawning budgetary gap, Kuwait seems to be running out of options. The General Reserve Fund, essentially its Treasury, has been tapped so aggressively in recent months that its liquid assets could come close to being depleted within the current fiscal year or by April 2021.

Oil giant Russia, though not that dependent on oil sales as the Opec states are, is also considering options to protect its revenues from oil price crashes in the future.

As per a recent report of the Russian news agency Interfax, Moscow is evaluating whether to adopt a kind of state oil hedging programme like Mexico. The Mexican oil hedge, or the Hacienda Hedge, is considered the biggest hedging bet on Wall Street as well as perhaps the most secretive. As per Oilprice.com, the hedge has earned Mexico — and a few large investment banks — billions of US dollars. Russia could adopt this path too.

The horizon, of the once fancied oil-rich world, seems graying!

Published in Dawn, July 26th, 2020