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OPEC + member countries are on the brink of a financial crisis if the latest assessments from the International Monetary Fund (IMF) are accurate. The IMF has presented a very bleak outlook for an economic recovery in the Middle East and Central Asia, forecasting a contraction of 4.1% for the region. The main driver of this bearish outlook is the IMF’s forecast that oil prices will remain in the $ 40- $ 50 range in 2021. An extension of the current environment of low oil prices for another year would seriously hurt oil and gas exporting countries, which includes all members of OPEC +. In its statement, the IMF forecast an economic contraction of 2.8% in April for the Middle East and Central Asia. IMF Director Jihad Azour highlighted a large disparity in projected economic loss for oil-importing and exporting countries, forecasting negative growth of 6.6% for oil-exporting countries, compared with a contraction of 1, 3% for oil importing countries. Given that many of the OPEC + members are rentier states, the need for higher oil prices cannot be underestimated. A large part of the government budgets of OPEC member states depends on oil and gas related revenues. As such, all OPEC countries are seeing significant budget deficits this year, especially Saudi Arabia, the United Arab Emirates, Bahrain, Iraq, Iran, and Kuwait. Former OPEC member Qatar is in a similar situation, even as it tries to mitigate the damage by increasing its LNG exports. As both oil and gas demand have seen significant demand destruction this year, prices for both have plummeted. Currently, Brent oil prices are still 40% below pre-COVID levels. There is little hope for a significant increase in prices in the short term, as global oil and gas storage volumes are still at historically high levels, and demand appears to decline again due to new COVID-related lockdowns and increased economic recession. The equilibrium price that is frequently quoted for the Saudi government budget is $ 80 per barrel, although discussions of the Saudi government’s budget appear to revolve around an oil price of $ 50. Iraq has also stated that it expects price levels of $ 50 per barrel by 2021. These optimistic predictions appear to be based solely on post-Covid Chinese economic figures, which have proven to be highly unreliable and do not take into account the fact that demand for Chinese products should also rebound. The impact of the second wave of COVID cases in Europe and America will undoubtedly affect this demand for Chinese products. Related: Biden’s $ 2 Trillion Energy Plan Could Crush Natural Gas
But of all the parties that will suffer from low oil prices and the continuing impact of a global pandemic, OPEC + members will suffer the most. Some oil and gas producers were already in dire financial straits before COVID, including Libya and Venezuela. The main contango of the oil market and excess storage have been largely overlooked recently, but it still exists. Reports of recovery in demand in some markets appear to be more wishful thinking fueled by multi-million dollar cash injections rather than a viable economic recovery. OPEC and the IEA agree that demand is still incipient, as both cut forecasts for world oil demand. The IEA cut its forecast for world oil demand to 91.7 million barrels per day this year, while OPEC lowered its forecast to 90.2 million in 2020. OPEC reiterated that cuts can still be made in the future. .
With the financial environment described above, OPEC + members can no longer afford to base their economic stability and future solely on hydrocarbons. Economic diversification must be implemented, even if the effects will not be felt for years. Government budget cuts are imminent and could destabilize the region if not done wisely. Discussions in OPEC + on market stabilization should not now focus solely on price levels or market share. The real question is how to create a market that is resilient enough to deal with the events of the Black Swan without overthrowing the current ruling elite. Instability is increasing not only in Arab producing regions, but also in Russia, where sanctions and low oil prices are taking their toll.
Members of OPEC + cannot just bet on the death of American shale, as it is an industry that has proven to be incredibly difficult to kill over the years. It is almost certain that the US shale will resurface, possibly in a different form, but it is reasonable to assume that the sector itself is far from dead. Leaders in Riyadh, Abu Dhabi, Moscow and Kuwait City now have to find a way to survive. With oil at $ 50 a barrel in 2021, some OPEC members will be in a real crisis. With that in mind, a conventional OPEC + JMMC statement today or tomorrow will be seen by some as a white flag.
By Cyril Widdershoven for Oillahoma
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