Middle East Energy Review - June 2020

The Middle East region, home to a large part of global oil and gas reserves and production, is currently experiencing a double-blow of the COVID-19 pandemic and low oil prices.

The biggest oil producers in the region have pledged to reduce their crude oil production as part of a new OPEC+ deal to rebalance the oversupplied oil market. But the crash in oil prices and the uncertain recovery in global oil demand and international oil prices are straining the finances and government budgets of the oil-exporting nations in the Middle East, most of which are either members of OPEC or are part of the broader OPEC+ coalition.

OPEC+ Deal and additional pledges to support market recovery

Producers in the Middle East have started to show that they are really trying to tighten the oil market since the OPEC+ deal entered into force. Under the agreement, the OPEC+ group has promised to cut combined oil production by 9.7 million barrels per day (bpd) in May and June, and then ease those collective cuts to 7.7 million bpd for the rest of the year.

Saudi Arabia, which has to reduce its oil output to 8.5 million bpd in May and June, said that its energy ministry had ordered Saudi Aramco to reduce its crude oil production for June by an extra voluntary amount of 1 million bpd, in addition to the reduction the Kingdom pledged in the OPEC+ deal in April. Saudi Arabia’s oil production in June is set to be around 7.5 million bpd, while OPEC’s top producer is said to have also started to tighten its supply to the market by allocating lower volumes than some buyers in Asia had nominated for June.

OPEC’s fourth-largest producer, Kuwait, said in April that it had already started to reduce crude oil supply to international markets “sensing a responsibility responding to market conditions,” Kuwait’s Oil Minister Khaled Al-Fadhel told the official state Kuwait News Agency (KUNA).

Kuwait, as well as OPEC’s third-biggest producer, the United Arab Emirates (UAE), have also pledged deeper cuts than their shares of the reductions in the OPEC+ agreement.

Iraq, the second-largest oil producer in OPEC after Saudi Arabia, has always struggled to comply with the cuts in the previous deals. This time around, Iraq is reiterating its commitment to the cuts, signaling that it could pull off better compliance now that low oil prices are severely battering its budget income, the vast majority of which comes from oil export revenues.

Saudi Arabia and Kuwait will suspend crude oil production from the Al-Khafji oil field they jointly operate for a month beginning on June 1, Abdullah Al-Sumaiti, the acting CEO of Kuwait Gulf Oil Company (KGOC), told Kuwait’s official KUNA news agency on 21 May.

Two weeks into the new OPEC+ deal, its leaders Saudi Arabia and Russia issued a statement, saying that “Our two nations remain firmly committed to achieving the goal of market stability and expediting the rebalancing of the oil market. We are confident that our partners within OPEC+ are fully aligned with our goals and they will comply with the OPEC+ agreement.”

“We would like to especially commend the efforts of responsible producers around the world who have willingly adjusted their production out of a sense of shared responsibility,” Saudi Arabia’s Energy Minister, Prince Abdulaziz bin Salman, and Russia’s Energy Minister Alexander Novak said in the joint statement.

“We are also pleased with the recent signs of improvements in economic and market indicators, especially the growth in oil demand and the ease in concerns about storage limits as various countries around the globe begin to emerge from their stringent lockdowns,” the ministers noted.

A few days later, Sultan Ahmed Al Jaber, UAE Minister of State and Group CEO of the Abu Dhabi National Oil Company (ADNOC), said that signs were already emerging that oil markets had tightened in recent weeks and would rebalance over time.

“The OPEC-plus agreement, voluntary cuts outside OPEC-plus plus, and production shut-ins are working together to start to rebalance the market,” Al Jaber said.

The economic toll of COVID-19 and low oil prices

While major oil producers in the Middle East pledge support and actions to accelerate the market rebalancing, their economies and oil revenues suffer from the low oil prices. Saudi Arabia, for example, introduced ‘tough’ austerity measures, as its Finance Minister Mohammad Aljadaan said. The Kingdom triples the value added tax (VAT) to 15 =% from 5% beginning in July 2020 and will discontinue the cost-of-living allowance as of June 2020. For Saudi Arabia, “the first economic shock was the unprecedented decline in oil demand, which led to lower oil prices and a sharp decline in oil revenue that represents a main source of public revenue for the state budget,” Aljadaan said.

Three weeks after the announcement of the austerity measures, Moody’s changed the outlook on Saudi Arabia to ‘negative’ from ‘stable’, to reflect “increased downside risks to Saudi Arabia's fiscal strength stemming from the severe shock to global oil demand and prices triggered by the coronavirus pandemic, and from the uncertainty regarding the degree to which the government will be able to offset its oil revenue losses and stabilise its debt burden and assets in the medium term.”

The price collapse will raise the Kingdom’s debt and erode its fiscal buffers, Moody’s said, but noted that it kept its A1 rating on Saudi Arabia because the country’s fiscal and foreign currency buffers remain large, albeit materially lower than a few years ago.

“The government’s vulnerability to oil price declines is balanced by the sovereign’s very large hydrocarbon reserves and low extraction costs, which support economic resiliency even in a low oil price environment,” according to Moody’s.

The economic outlook for the Middle East, North Africa, Afghanistan, and Pakistan (MENAP) oil exporters has weakened significantly with the pandemic and sharp decline in oil prices, the International Monetary Fund (IMF) said in its Regional Economic Outlook Update in April.

Oil prices at below $30 a barrel could result in more than US$230 billion in lost annual revenue across MENAP oil exporters, placing significant strains on fiscal and external balances. Some countries such as Bahrain, Iraq, and Oman could see a rapid depletion of their fiscal buffers, the IMF warned.

“The current crisis has brought the region’s vulnerability to oil price volatility into sharp focus and underscored the need for fiscal adjustment over the medium term,” the IMF said.

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