Dubai: The fall of the Libyan regime and the resumption of oil supplies from that country is expected to drive down oil prices, and this is likely to exert pressure on huge spending plans by the Gulf governments, experts say.
Global oil prices have been facing downward pressure in recent weeks as slowing economic growth in the US and Europe continued to undermine global oil demand.
In London, Brent crude for October delivery was down $3.22 per barrel to $105.40 in early trade on the ICE Futures exchange, but later the prices edged up to $107.17. The US benchmark West Texas Intermediate (WTI) was trading 1.4 per cent up at $83.60 in early trading on the New York Mercantile Exchange.
"Oil prices, which have been under pressure recently from global growth concerns, are likely to remain pressured as the prospect of Libyan oil coming back on to the market is raised," Tim Fox, chief economist of Emirates NBD, wrote in a note.
The deceleration in US and European economic data suggests that a global economic slowdown has already been unfolding over the past two months. Leading indicators point to a further cyclical deterioration ahead that could drive oil prices still lower.
"Adding the current uncertainty linked to the US downgrade and the European debt crisis, we find that the global economy is standing on very frail pillars. The loss in confidence could add a further drag on private consumption and investment and thus economic growth more generally," said Francisco Blanch, Commodity Strategist with Bank of America Merrill Lynch.
Brent crude has traded as high as $127.02 this year, the highest since 2008 when prices reached an all-time peak above $147. Analysts say any long-term oil price decline prompted by demand destruction could put immense pressure on a number of huge public spending programmes announced by the GCC oil producers.
Analysts said a sustained decline in oil prices could jeopardise the huge public spending plans and budget balances of the Gulf governments.
The public spending programmes announced by Gulf governments following the political turmoil in the Middle East and North Africa region are expected to accelerate growth rates, but have pushed up the previously budgeted breakeven oil prices.
"In Saudi Arabia, in particular, the massive fiscal spending spree announced year to date has reached almost $120 billion, up by about 25 per cent of 2011 GDP. We estimate this has moved the breakeven oil price for the Saudi budget for 2011 to $95 per barrel," said BofA Merrill Lynch's Blanch.
Break-even crude levels to rise higher
Various economists have pegged the six Gulf countries' break-even oil prices in the range of $60 to $95.
According to a recent estimate by Citigroup, one impact of higher government expenditure is that the price of oil at which the budget moves from a deficit to a surplus (the fiscal break-even oil price) will rise from around $67 to $87 this year, and hover around the mid $80s in the short term.
"In our view, GCC governments can withstand further easing in oil prices without jeopardising budget spending this year. Our calculations suggest that the Opec [Organisation of Petroleum Exporting Countries] reference price would have to average around $60 between now and end-2011 before the annual average price approaches ‘break-even' for GCC budgets," Khatija Haque, GCC economist at Emirates NBD, said.
Some analysts say the supply side impact of Libyan oil on global oil prices will take a long time. According to industry estimates, if the fighting ends soon, Libya's production could reach 500,000 barrels a day within two months. But this amount would be largely absorbed by domestic needs. Ramping up above this level would then be complicated by extensive damage during the war.
"Even with an end to the armed conflict, it could take several months for Libyan oil supply to normalise. Nevertheless, even with some further easing in oil prices, it seems unlikely that the 2011 average price will approach the $90 we estimate to be the UAE break-even oil price," said Haque.
According to consultancy firm Wood Mackenzie it will take around three years for the country to recover its full production capacity. In 2010, the country, which has the largest proven oil reserves in Africa, produced 1.8 million barrels a day of crude and other petroleum products.
