Middle Eastern producers desperately wait for oil prices to rise
A combination of continued production cuts and increased economic activity have pushed oil prices back to pre-pandemic levels – a factor that will be crucial for the recovery of major oil-producing countries in the Middle East. East and Africa.
Brent crude prices topped $ 60 a barrel in early February, the first time they exceeded pre-Covid-19 values. They have since continued to rise, surpassing $ 66 a barrel on February 24.
This increase in oil prices, which have climbed 75% since November and around 26% since the start of the year, marks a dramatic change from last year.
With the closure of many national borders and the implementation of travel restrictions to stop the spread of the virus, demand for oil has plummeted around the world.
Following the Saudi-Russian price war in early 2020, Brent crude prices fell from around $ 60 per barrel in February of that year to a low of $ 20 per barrel. April, as supply increased and demand collapsed. The value of WTI crude – the primary benchmark for oil in the United States – fell to a record low of around $ 40 a barrel last year due to a lack of storage space.
While global demand for oil remains weak, one of the factors credited with turning the tide is the decision to significantly cut oil production, which subsequently squeezed global supplies.
In April, members of the Organization of the Petroleum Exporting Countries (OPEC), as well as other oil-producing countries, including Russia, Azerbaijan, Malaysia and Mexico, agreed to reduce total world production by 9.7 million barrels per day (bpd) – equivalent to around 10% of world production.
The 23-country group, known as OPEC +, decided to cut cuts to 7.7 million bpd in August, before announcing in early December that it would increase production by 500,000 bpd from January 2021.
Fearing the most recent move may have led to excess oil on the market, Saudi Arabia has announced it will cut an additional 1 million barrels per day between January and the end of March.
Another factor that appears to be supporting the rise in oil prices is the improving economic outlook.
With the global rollout of various Covid-19 vaccines, it is hoped that the world will return to a degree of normality in 2021 in terms of travel and consumption, an outcome that would further stimulate demand.
In an annual outlook released in mid-February, OPEC predicts that oil demand for the full year will increase by 5.8 million barrels per day from 2020 levels, in part due to improved oil prices. global economic climate and significant stimulus measures from governments around the world.
“As the global economy shows signs of a healthy recovery in 2021, demand for oil is currently lagging but is expected to pick up. [the second half of] 2021, ”the group said in a statement. “With this, a healthy rebound in oil demand, coupled with the vigilant stance and tremendous efforts of the countries participating in the Declaration of Cooperation, is essential to maintain the stability of the oil market.”
As for the value of oil going forward, at the end of January, the IMF predicted that oil prices would average $ 50 per barrel this year, above the 2020 average of $ 41.30.
However, the continued rise in prices in the first two months of the year has led to more optimistic estimates, with Dutch multinational banking firm ING forecasting average annual prices of $ 65 per barrel, while investment bank Goldman Sachs forecast that Brent prices will rise as high as $ 75 a barrel in the third quarter of the year, $ 10 more than previous estimates.
The key to economic recovery
Any further rise in oil prices would contribute significantly to the recovery of emerging oil-producing markets.
Just as the rapid fall in prices hit hydrocarbon exporters hard last year, the rebound could play a key role in spurring broader economic growth.
For example, in Saudi Arabia, where oil accounts for around 45% of GDP, the country expects a budget deficit of 4.9% of GDP this year, according to its 2021 budget, released in December.
However, a sustained rise in oil prices could significantly improve the country’s fiscal position. The IMF predicts that the Kingdom’s oil price equilibrium will be $ 67.9 per barrel this year.
In addition, the government expects the economy to rebound from last year’s 3.7% contraction with 3.2% growth in 2021.
The current situation should also benefit Nigeria, which derives 10% of GDP, 57% of government revenue and 80% of its exports from oil. The country’s budget for 2021 has a benchmark oil price of $ 40 per barrel, well below current levels.
Likewise, in Oman, analysts hope that rising oil prices may improve the country’s economic performance, with this year’s budget figures based on average prices of $ 45 a barrel.
Threats to the stability of oil prices
While the outlook for oil-producing countries looks significantly better than in 2020, there are still a number of factors that could hamper a sustained rebound.
Chief among them is the potential for further outbreaks of Covid-19. Another is the possibility of delays in vaccine deployment, which could lead to the extension of travel restrictions and general travel.
Another factor that could affect the stability of the oil market in the near term is the upcoming OPEC + meeting on March 4, a potentially important event in determining policy for the rest of the year.
While a number of countries, led by Saudi Arabia, are expected to push for extended production cuts, others, like Russia, are likely to call for further easing of measures.
In some corners, some fear that a too early reduction in production cuts could flood the market with oil, subsequently leading to a fall in prices, while others fear that a lack of an increase in production will flood the market with oil. ‘exerts an additional tax burden on oil-producing countries.
Indeed, with the current production cuts, most OPEC + countries are producing less oil than expected in their budget forecasts for the coming year.
By Oxford Business Group
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