GCC countries set for big gains from surge in oil prices

Dubai: The steady rise in oil prices driven by demand recovery and supply shortfall are expected to bring in an economic windfall to oil exporters, especially to the GCC countries in 2022, according to economists and analysts.

The Institute of International Finance (IIF) is forecasting Brent oil prices to average $81 per barrel (p/b) in 2022, as compared with $71/b in 2021.

Many leading oil analysts are expecting a further surge in oil prices towards the yearend 2021 and early 2022.

Goldman Sachs in a recent report said that a strong rebound in global oil demand could push Brent crude oil prices above its year-end forecast of $90 p/b while global financial group MUFG is not ruling out the possibility of Brent crossing $100/b before larger supplies correcting the market.

The IIF expects oil prices to remain high for the rest of this year and in 2022 due to accelerated gas-to-liquid substitution; the likelihood OPEC+ not raising oil production significantly; and no new agreement over Iran’s nuclear programme.

According to MUFG forecasts, prevailing market deficit, which started in June 2020, will not pivot into oversupply until Q2 2022. Given the tight oil market, MUFG has forecast Brent ending Q4 2021 and Q1 2022 at $85/b and $82/b, respectively. Thereafter, as the market is expected to return to a mild surplus, to price moderation to $74/b, $72/b, and $66/b in Q2, Q3 and Q4 2022, respectively.

Winners and losers

The biggest beneficiaries from the oil price surge are net energy exporting countries with large terms of trade gains.

“Large oil exporters are getting a sizable boost to their terms of trade from higher prices, leading to wider current account surpluses particularly in Saudi Arabia, the UAE, Qatar, and Russia,” said Garbis Iradian, Chief Economist MENA of IIF.

The fiscal balances in major oil exporting countries will shift to sizeable surpluses in 2021 and 2022. Net hydrocarbon exports and hydrocarbon government revenues account for more than half of total exports and total government revenues of GCC countries. Consequently, the fiscal deficits of 2020 is forecast to shift to surpluses in 2021 and 2022 in most oil exporters.

Among net oil importers, for every $10 increase in oil prices, the current account deficit is forecast to widen by $25.4 billion in India, $9.2 billion in Turkey, $7.9 billion in Thailand, and $4.1 billion in Pakistan.

The terms of trade loss are particularly sizable for countries with hydrocarbon imports of above 4 per cent of GDP—including, Thailand, Turkey, Chile, Jordan, Morocco, and Lebanon. The sharp increase in oil and natural gas prices has begun to weigh on external balances, raising vulnerabilities for these countries. Wider current account deficits in these countries could lead to difficulty in meeting external financing.

While China is the largest consumer of oil and natural gas, accounting for about 14 per cent of the world’s total consumption, according to the IIF, the impact will be limited given the size of the economy, and the current account will remain in a significant surplus, supported by continued robust growth in exports.

India’s gross imports of crude oil and natural gas is relatively large at 4.6 per cent of GDP in 2021 but is also a significant exporter of petroleum products (1.5% of GDP). Moreover, India and Indonesia reformed their fuel subsidies several years ago to limit the vulnerability of the fiscal positions to higher global oil prices.

Falling budget breakeven prices

Fiscal/budget breakeven oil price or the minimum level of oil price required to balance the budgets are on steady decline for most oil exporters.

“With continued significant progress in fiscal adjustment, the fiscal breakeven oil price for most oil producers has been declining in recent years and our projections show that they are now below $70/b for Saudi Arabia, the UAE, Qatar, Oman, and Angola,” said Iradian.

At an average oil price of $81/b in 2022, the fiscal balances are projected to be in surpluses of more than 3 per cent of GDP in Russia, Saudi Arabia, the UAE, Qatar, Iraq, Oman, and Angola.