Gulf countries on the brink of disaster

US, WASHINGTON (ORDO NEWS) — Three Kuwaiti experts specializing in the oil market caution the Persian Gulf against the so-called “black scenario” of the ongoing oil war between Russia and Saudi Arabia. If the United States does not intervene in the conflict and put an end to it, it will probably continue for a long time to come.

According to experts, the absence of positive changes in the current situation and the consequences of the spread of coronavirus can lead us to disaster. The oil price will drop below $ 10 per barrel, which means that the Gulf countries will face “need”, although no one even imagined such a development of the situation.

According to Kuwaiti analysts, a pessimistic view of the consequences of a trade war between China and the United States was formed a year ago, when the price of a barrel of oil did not rise above $ 60. With the start of the spread of coronavirus in China, the largest consumer goods exporter in the world and the second largest oil importer, it was expected that the price would not fall below $ 40. The countries hoped for the opportunity to compensate for the decline in consumption in China through the markets of other countries, as well as the extension of the OPEC + agreement to reduce oil production.

However, Russia refused to support a further reduction in oil production as part of the general policies of OPEC and a group of independent producers. The agreement was concluded in 2017 and extended in 2018 and 2019, until a crisis arose in March and oil prices fell from $ 45 per barrel to less than $ 30.

During the last meeting of the parties to the agreement, Moscow renounced its obligations because it was losing market share in favor of American shale oil, while Saudi Arabia wanted to continue its adopted policy, which would limit supplies and maintain price stability. However, later it moved to unprecedented measures – it began to produce oil, not observing OPEC restrictions.

Saudi Arabia ramps up production

Saudi Arabia announced an immediate increase in production. Currently, it is 12.2 million barrels of oil per day, and it is planned to increase the figure to 13 million barrels by May. Saudi oil has fallen in price by about $ 10 per barrel, and other OPEC countries, such as Kuwait and the UAE, are also forced to increase production to maintain their market share and lower prices. Thus, everyone was involved in a price war that is being waged in a non-competitive environment due to low oil demand. As a result, the situation will worsen.

According to economist Talal al-Bazali, the Saudi approach is very dangerous for oil prices, as they can drop to $ 15-20 over the next three months. And this is a rather optimistic scenario, since according to other estimates, the price of a barrel of oil in 2020 will fall below $ 10.

According to the expert, American oil reserves have increased by two million barrels since the crisis began, and with the decision of Saudi Arabia to produce 13 million barrels per day for two months, Kuwait is now obliged to abandon its current obligations under OPEC regarding its production. He needs to compete with other countries and to do this, lower oil prices without any restrictions.

Al-Bazali believes that the Gulf countries can take advantage of the current crisis to create an OPEC organization for their region, decisions in which will be made independently of other countries, such as Russia and Mexico. In this case, it will control about 53% of world reserves and about 26% of production, which will allow them to fully control prices.

Oil strategy expert Abdel Hamid al-Awadi argues that a significant drop in oil prices, accounting for 65% of world trade, has led to lower prices for many other products, which explains the sharp collapse on world exchanges. In other words, all producers will suffer losses from the current price war, including Russia and the United States, given that a price of $ 25 per barrel may not cover the cost of a number of products around the world.

State budget implications

According to Al-Avadi, since the Gulf countries account for 53% of OPEC production, lower prices will have a negative impact on state budgets, since the latter depend on income from oil sales by 85-95%.

A vivid example is Kuwait, whose budget for 2020-2021, the implementation of which will begin in April, is based on an estimated price of $ 55 per barrel. It assumes government revenues of 16.5 billion dinars (Kuwait produces 2.7 million barrels per day). The budget deficit reaches nine billion dinars (one dinar is equivalent to 3.2 dollars).

When calculating revenues, based on the price of $ 25 per barrel of oil and subject to maintaining current prices during the new fiscal year, the budget will receive only 7.5 billion dinars, that is, 55% less compared to initial estimates. It will cover only about 45% of estimated expenses, and the total budget deficit will amount to 18 billion dinars.

As a result of the crisis, the dollar exchange rate against the Kuwaiti dinar has grown significantly. The budget was calculated at the rate of 0.302 fils per dollar, but currently the exchange rate is 0.310 fils.

According to al-Awadi, Kuwait, like other Gulf countries, is required to take preventive measures. First of all, this means revising expensive projects, postponing the launch of some of them, and starting a policy of optimizing costs so that state reserves remain intact.

Kamal al-Harami confirms that countries are facing a real financial catastrophe, since the optimal price of oil to maintain government spending in most OPEC countries ranges from $ 90 to $ 95. For example, in Kuwait it is 83 dollars, in Saudi Arabia – 95 dollars, in Iraq – about 120 dollars, and in Iran and Nigeria – more than 150 dollars per barrel. Thus, all these states will have to use reserves or use external loans to compensate for the difference.

According to the expert, in Russia oil revenues cover 40% of the budget, and the reasonable price for this energy carrier for the country is $ 42 per barrel. In addition, it is able to adapt to changes and depreciation of the ruble, as it has other resources besides oil. In other words, all states will suffer losses, but this will affect Russia to a lesser extent compared with the Gulf countries. Shale oil producers will not suffer either, as the American authorities support and protect them.

Al-Harami believes that a fall in oil prices to ten dollars per barrel can be considered a black scenario. In these conditions, the Gulf countries will face “poverty”, which means that the world community must come to a consensus and put an end to the crisis.

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The article is written and prepared by our foreign editors from different countries around the world – material edited and published by Ordo News staff in our US newsroom press.