'Oil prices could fall to $30'

Abu Dhabi: Reforms are likely to be speeded up in oil-producing countries as oil prices fall to record levels due to production and weak demand.

From $115 (Dh422) per barrel in 2014, oil prices fell to less than $35 per barrel this week. Brent, the global benchmark, was trading slightly more than $33 per barrel on Thursday.

Though low oil price is likely to benefit oil-consuming countries like India and China, but sluggish growth in the global economy could halt their plans of rapid growth, analysts said.

“There will be more belt-tightening measures. We will see governments cut unnecessary expenditure wherever they can as part of reforms programme. Subsidy removal initiatives will continue,” said Sachin Mohindra, Senior Vice-President and Portfolio Manager of Invest AD.

Saudi Arabia last month announced they would raise fuel prices by 50 per cent as the country posted a record $98 billion (Dh360 billion) budget deficit in 2015 due to the sharp fall in oil prices.

Bahrain and Oman too would be cutting subsidies as low oil prices hit their revenues. The UAE deregulated fuel prices and a new pricing policy linked to global prices was adopted.

Oil companies are likely to feel the heat.

A number of projects could be cancelled or delayed. World Oil Outlook Report released by Opec last month said the market instability has led to a number of projects being deferred or cancelled altogether, rig counts falling dramatically, costs being squeezed and redundancies being made.

The three pillars of the global economy, namely, the global oil industry, global investments and the economies of the oil-producing countries, are all adversely impacted by low oil prices.

According to Dr Mamdouh G. Salameh, an oil economist and consultant to World Bank, the global economy will grow half a percentage point less in 2016 because of low oil prices.

The global investments have so far declined by $150 billion from $700 billion to $550 billion in one year.

The Arabian Gulf oil producers will lose at least $234 billion in revenue this year with Saudi Arabia alone accounting for $160 billion,” he said.

He added that oil shale production declined by 600,000 barrels per day in 2015 and is projected to decline by another 900,000 barrels per day in 2016.

“Their current $170 billion debts will pile up particularly with the rise in the US interest rate.”

Russia’s revenue loss is comparable to Saudi Arabia though the Russians have managed to mitigate the loss by adding 1 million barrels per day to their production and signing lucrative oil and gas deals with China worth $1 trillion.

The fall in prices depicts what is truly happening in the market right now and that is that the markets are still in oversupply, Daniel Ang, an analyst from Phillip Futures said.

“It also suggests that high amount of selling pressures are in the market at the moment. So, in terms of how low it could go, considering how much prices have fallen already, it would seem that supports at $33 are not going to hold strong,” he said.

“If today’s European trading hours did not support prices, it is highly likely it would be the same for US hours. This also means prices could fall further towards $30.”