Arab Gulf producers need much higher oil prices

After a brief reversal on Monday, oil price gains were back on track on Tuesday as tensions in the Middle East reached a fever pitch. Brent crude for November delivery rose 1.4% to trade at $74.93 a barrel at 1:10 p.m. ET, while WTI crude for October delivery rose by a similar margin to change hands at $71.33 per barrel.

Last week, Israel launched an unprecedented event pager and walkie-talkie attack on Hezbollah communications that injured thousands of militiamen and operatives of the organization. The assault was quickly followed by the assassination of Ibrahim Aqil, a key Hezbollah leader before Israel targeted Hezbollah leader Ali Karaki, the head of the southern front, whose fate remains unknown. Israel’s strikes in southern Lebanon have left nearly 500 dead and increased the threat of this escalating into a regional war.

Most of the Gulf oil and gas heavyweights are not celebrating the latest rally.

After enjoying a rare budget surplus in 2022, most Gulf Cooperation Council (GCC) economies are seeing their budget deficits widen, with current oil prices still well below what they need to balance their budgets.

According to the IMF, Saudi Arabia, the GCC’s largest economy, needs an oil price of $96.20 per barrel. to balance their booksthanks in large part to MBS’s ambitious 2030 vision. The situation isn’t helped by the fact that over the past few years, the oil-rich nation has borne the brunt of OPEC+ production cuts after agreeing to cut 1 million barrels a day day. or almost half of the group’s 2.2 mb/day in promised reductions. In fact, Saudi Arabia sold less oil at lower prices, thus exacerbating the revenue shortfall.

Related: Saudi Aramco looks to raise $3 billion from new bond issue

But it’s not all doom and gloom. Vision 2030 is about diversifying Saudi Arabia’s economy and making it less susceptible to oil price shocks. And, it seems to be working: Saudi Arabia’s Ministry of Economy and Planning has revealed that non-oil revenues will reach 50% of the Kingdom’s gross domestic product (GDP) in 2023, the highest level ever. The country’s non-oil economy was valued at 1.7 trillion Saudi riyals (about US$453 billion) at constant prices, driven by steady growth in exports, investment and consumer spending.

Last year, the Kingdom’s private sector investment expanded by 57 percent to a record 959 billion Saudi riyals ($254 billion), while exports of arts and entertainment and real services rose by triple digits to 106 percent and 319 percent respectively, reflecting the Kingdom’s transformation into a global tourism and entertainment destination. Meanwhile, the food sector saw a 77 percent increase; transport and storage services grew by 29 percent, health and education grew by 10.8 percent, trade, restaurants and hotels by 7 percent, while transportation and communications grew by 3.7 percent .

As you might expect, rapidly diversifying the economy comes at a high price, with the IMF saying Saudi Arabia now needs oil prices more than $20/barrel higher than current levels.

“At least until 2030, Saudi Arabia will have massive budgetary needs due to the need to demonstrate some significant results in key Vision 2030 projects and to prepare for and host major sporting and cultural events,” Li-Chen Sim, Middle East Institute researcher said CNBC.

However, as an OilPrice.com contributor Irina Slav he notedSaudi Arabia can simply put the brakes on Vision 2030, turn it into Vision 2040 or even Vision 2050 if the oil markets refuse to cooperate.

But Vision 2030 is not solely to blame here. The IMF estimates that Bahrain and Algeria require oil prices of $125.7 per barrel to achieve budget balance; Iraq $93.8 and Kuwait $83.5 per barrel to avoid deficits. Among the six GCC countries, only the UAE and Oman are expected to post a surplus.

Fitch designed the UAE oil price will have a fiscal return average 64 USD/bbl in 2024-2026, although Abu Dhabi’s dividend plans could throw a wrench into the mix here, with higher payouts reducing that average price. The consolidated surplus will reach 3.3% of GDP in 2025 and 2.6% in 2026.

Fitch also predicted that Oman will run a budget surplus, although the surplus will narrow to 2.2% of GDP in 2024 and 0.9% in 2025 from 3.2% in 2023.

Economic slowdown

In July, a Reuters poll of economists PREDICTED that GCC economies will grow at a considerably slower pace this year due to ongoing cuts in oil production, with Saudi Arabia’s economy among the hardest hit. A July 8-22 survey of 24 economists predicted Saudi Arabia’s economy would expand 1.3 percent this year, down from 1.9 percent forecast in an April survey and 3.0 % forecast in January.

However, the United Arab Emirates (UAE) is expected to post a better growth rate of 3.7% as it soon increases oil production and continues to focus on tourism. Kuwait is expected to remain in recession this year, while Qatar, Oman and Bahrain grow by 2.2%, 1.6% and 2.6% respectively. Overall, GCC economies are expected to grow by an average of 1.9% in 2024.

“Lower oil revenues impact non-oil growth. Saudi Arabia is in the process of revising Vision 2030 and adjusting investment spending… The impact on real GDP growth is clear – less investment means a more moderate growth outlook”, said Ralf Wiegert, MENA head of economics at S&P Global Market Intelligence.

The GCC outlook for 2025 is better, with Saudi Arabia’s economy expected to expand by 4.5% in 2025, while the UAE is expected to grow by 4.2%. In addition, the region is expected to continue to experience a modest inflation rate, with average forecasts ranging from 1.0% to 3.0% in 2024, including the lowest in Oman and the highest in Kuwait. Saudi Arabia is expected to record an inflation rate of 2.1% this year.

By Alex Kimani for Oilprice.com

More top reads from Oilprice.com