Crude oil pump drill jack
Over the course of this month, oil prices stabilized at a rather convenient $40-$45 a barrel compared to five months ago. Image Credit: Pixabay

Over the course of this month, oil prices stabilized at a rather convenient $40-$45 a barrel compared to five months ago, when they were below $16 and created complex conditions for oil-producing countries. Prices are expected to recover by the end of this year, helped by resumption of commercial activities that were severely affected by COVID-19 and the subsequent shut down of economies.

The reasons behind the upward trend in prices are many, but in particular the OPEC+ agreement to reduce production by a staggering 10 million barrels per day was instrumental. The agreement saw a commitment to cut production quotas by 90 per cent, something which has historically been rare in such cases. Even those who exceeded their quotas at the beginning of the agreement, such as Iraq and Nigeria, quickly got back to full commitment owning to pressure by major countries from inside and outside OPEC, such as Saudi Arabia and Russia.

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Another reason could be easing of lockdown measures, especially by the biggest oil consumers, such as China, the US, EU and Japan, after they put in place measures to slow the spread of the pandemic. This consequently led to an increase in demand and created the conditions for higher prices.

Much to be relieved about

Although there is still a drop in production, estimated at 8 million barrels per day against last year, this is considered a great positive. More so when compared to the decrease in demand by 30 million barrels per day at the beginning of the pandemic crisis.

A different set of concerns

Hence, the core problem facing oil producing countries does not revolve around price levels, especially if it approaches $50, as widely expected. It rather lies in the low levels of production due to OPEC+ commitment to agreed quota cuts, representing 20 per cent of production, as is the case with Saudi Arabia.

This means the recovery of economies of oil-producing countries depends on further gains in oil prices from a rise in demand. This will take longer than the time required for price gains, which are often led by speculation and the state of the financial markets. But production levels are subject to clear-cut requirements related to the actual needs of consumers.

Recently, the Saudi Energy Minister Prince Abdulaziz bin Salman said the volume of demand in the fourth quarter to reach 97 per cent of what it was before the virus crisis. However, the double suffering of oil-producing countries will continue, as increased demand is beyond their control and strictly related to the policies of each country regarding the reopening of sectors.

The other factor depends on the producing countries themselves and has to do with the restructuring of their financial policies and adopting specific reforms. It cannot be said for certain that solving such an equation is easy for oil-producing countries. The first factor remains beyond their control, while the second depends on their ability to manage the crisis caused by the pandemic and the ability of their economies to cope with needed reforms that require further time, effort, and infrastructure.

The bottom-line is that these countries may have weathered the current bottlenecks and could be on their way to a gradual recovery.

- Mohammed Al Asoomi is a specialist in energy and Gulf social affairs.