Oil prices fall on weaker demand growth, surprise gain in US crude stocks
Revival in the global oil demand and prices is an opportunity for GCC governments to accelerate their efforts towards further diversification Image Credit: Pixabay

Economic prospects of GCC countries are looking bright with the consistent rise in oil prices over the past few months.

Brent has witnessed steady rise of more than 90 per cent since November last year. If the high prices are to hold up for longer, GCC states are sure to witness rapid economic revival from the impact of prolonged oil slump and COVID-19, which had weakened their fiscal positions, accumulated reserves.

The latest Regional Economic Outlook (REO) from the International Monetary Fund (IMF) had noted in April that oil prices and early vaccine roll-outs support the outlook for many GCC economies. The recent increase in oil prices is sure to boost confidence, supporting non-oil GDP, which was projected to expand by 3.3 per cent in 2021, with an assumption of average Brent prices around $60 a barrel.

With the brent prices crossing $72 this week various forecasts suggest that crude prices could cross $100 in 2022. A Bank of America Merrill Lynch (BofA) forecast on Sunday said Brent will now average $68 a barrel in 2021, compared to an earlier estimate of $63 per barrel. BofA sees the Brent price averaging as much as $75 a barrel in 2022, up from a previous forecast of $60 per barrel.

Deep slump

Oil dependent GCC economies were impacted by long term decline in prices since 2016 that was accentuated by further collapse in demand following the pandemic.

Between mid-2014 and early 2016, the global economy faced one of the largest oil price declines in modern history. The 70 per cent price drop during that period was one of the three biggest declines since World War II.

Booming US shale oil production played a significant role in the oil price plunge from mid-2014 to early 2016. Efficiency gains in the sector lowered break-even prices considerably, making US shale oil the de facto marginal cost producer on the international oil market.

Although supply side interventions by the Organisation of Petroleum Exporting Countries (Opec) led by Saudi Arabia have been able to limit the oil slump with limited success, the longer-term sustainability is largely a function of global demand.

Look beyond cycles

While the global oil majors and most analysts do not see oil heading to a new super cycle, they acknowledge that prices still have room to rise from current levels because of a strong demand rebound and expected tightness in supply. Trends and cycles in oil demand and prices will remain a major driver of GCC economies for a long time, although most countries in the reginal grouping, especially the UAE, Saudi Arabia and Qatar have made significant strides in economic diversification.

The long-term demand slump and low oil prices had driven home the need to diversify government income streams triggering deep fiscal and structural reforms in many GCC economies in recent times.

The revival in the global oil demand and prices is an opportunity for GCC governments to accelerate their efforts towards further diversification rather than slipping back to the boom bust cycles dictated by oil market volatility.