In a dramatic year that has turned the global economy around in many different ways, the economic situation in the GCC is finally starting to stabilise. Oil prices are fixed around $45 per barrel since June despite the slight increase in Opec+ output, which indicates the markets’ successful absorption of the increase.
Opec’s second largest producer, Iraq, finally committed to its previous statement to compensate for earlier production quota violations. It is a positive response to the organisation’s demands for the members to comply with the plan to stabilise the market for the greater good of all producers.
Return of travel
Kuwait’s crude oil export prices averaged $43.5 during June, and these stable levels continued during July and August, softening the anticipated deficit for the 2020-21 fiscal budget. The aviation sector has been one of the main drivers of the increase in demand for refined petroleum products, as the world’s largest air hubs such as Dubai International Airport, Heathrow, Atlanta International and Beijing restarted operations during the third quarter, reflecting the consumable amount of crude easily available on tap.
Shale’s headed down
The reduction in shale oil production and the close down of major fields in the Permian basin in Texas also affected in the shift of demand towards Middle Eastern crude oil supplies as production declined in the US. The Energy Information Agency estimates an average of $49.5 per barrel of Brent crude for 2021. The study concludes that production in the US will average 11.1 million barrels a day in 2021, down from an average of 11.3 million barrels in 2020 and 12.2 million barrels for 2019.
The reduction in output in the US is due to the lack of investments in exploration and drilling operations as the average crude price was $65 and $57 during 2018 and 2019, respectively. The Gulf states have shown great flexibility during the most difficult operating conditions as a result of the pandemic and the oil demand crash, the major Gulf oil producing countries have continued to supply the global economy as per the Opec+ agreement, and covering for other members’ non-compliance, to stabilise overall output.
The dedication of Gulf producers has given them extra credibility in the energy market, as recently witnessed in the $20.7 billion investment in Abu Dhabi in exchange for a 49 per cent stake in Adnoc’s gas pipeline infrastructure. This at a time when competitors are suffering from serious liquidity difficulties and deteriorating cash flow demonstrates Adnoc’s leading position in the energy market.
Adnoc is to lease 38 of its gas pipeline networks and the deal is expected to generate a $10 billion revenue for the national oil company. A similar deal was struck last year for $5 billion to lease 18 oil pipelines, with the major stake to remain with Adnoc. The performance of Adnoc and its GCC peers is widely recognised and should reflect positively on the economy.
— Feras Adel Al Salem is Vice President of Kuwaiti Business Council.