Thursday, 10th January 2019

More stable oil prices could reduce budget problems in 2019

The oil price remains volatile, but ministries of finance may take comfort in the views of their hydrocarbons sector counterparts – and a majority of international analysts – that crude won’t collapse once more this year. This reflects on the success of the Opec+ group – comprising the Organisation of the Petroleum Exporting Countries, Russia and nine other non-Opec producers – in raising prices in the past year. Opec’s co-ordination with non-Opec partners under the so-called Declaration of Co-operation encouraged crude prices to peak at around $85 a barrel (/bbl) in October.

There have been tensions – not least from US Donald Trump’s pressure on Saudi Arabia, which is again acting as the ‘swing producer’, to pump yet more crude. This got a response, especially in the aftermath of Riyadh’s apparent isolation following the Jamal Khashoggi killing; the kingdom spent much of H1 2018 producing well above its quota, as shown in the table. This is a major reason why Brent crude fell back to around $54/bbl at end-2018, as was Trump’s decision to grant exemptions to more of Iran’s biggest customers than expected after US sanctions were reintroduced in November.

However deep the Q4 18 price slide, the Declaration of Co-operation seems to have held firm. At their December meeting, Opec+ countries agreed a combined 1.2m b/d supply reduction for H1 2019 (with Libya, Iran and Venezuela exempted from the limits), to support a market with widely perceived weakening fundamentals. Big players, including number two producer Iraq, have committed to maintaining output.

Brent has since risen by nearly 20% from its late December low. Market soundings suggest Saudi Arabia has reined in its output and the kingdom’s energy minister Khalid Al-Falih has said renewed discipline will kick in from January. When Opec+ meets again in April, Al-Falih is “certain that we will extend” the agreement.

The price trajectory is uneven but the Opec+ group has remained relatively cohesive, even if Qatar is leaving Opec. In a stabilising market, as one analyst put it, “both grades [of crude, Brent and West Texas Intermediate] remain above their crucial ‘big figures’.”

Other factors are working in producers’ favour. The Norwegian Petroleum Directorate on 10 January reduced its forecast for 2019 crude production to the lowest level since 1988, at around 1.4m b/d. It said new developments had proved more complex than anticipated; buoyed by higher prices output should recover in 2020, NPD said.

Bahrain-based Apicorp Energy Research entitled its January 2019 note Oil prices to recover in 2019: barring sharp economic slowdown. It argued: “With US production expected to continue to remain strong in 2019, Opec+ cuts will take time to balance the market. But by the second half of 2019, Brent is expected to trade between $60-70/bbl, barring a sharp economic slowdown.”

This is not a bad bet – which will provide comfort to the region’s more prudent exchequers. Some 2019 budgets are in the $50-60/bbl range – Oman has set a $58/bbl price. But others may need a much higher price: Saudi Arabia’s projected oil revenues suggest the government’s budget figures are based on an average oil price of around $80/bbl. Current prices suggest prudent budgeting is required, which in many economies may still not be the case.

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