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Irina Slav

Irina Slav

Irina is a writer for the U.S.-based Divergente LLC consulting firm with over a decade of experience writing on the oil and gas industry.

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The Biggest Winners Of The Oil Price Slump

Brent crude has sunk to US$60 a barrel with WTI down to US$52 and, not surprisingly, talk about Brent hitting US$100 a barrel by the end of the year is suddenly scarce. Importers are breathing a sigh of relief, no doubt, and exporters are probably beginning to worry slightly.

Overall, the news about lower oil prices is good. It’s good for the emerging markets, as a Bloomberg review of the lower-price situation showed and as common sense would suggest. Every US$10 drop in the price of oil translates into a 0.5-0.7-percent of GDP increase in income in the biggest oil importers, an estimate by Capital Economics cited by Bloomberg revealed.

Now, economic growth in these same emerging markets slowed down this year, prompting a number of forecasters to revise down their oil demand projections. Lower oil prices would probably spur more demand, especially if the U.S. dollar weakens, as right now the strong greenback is serving as a deterrent to oil demand growth.

More demand is good for producers as a general rule, but it has to come at the right price and as usual, producers of crude and importers of the commodity have different views of what the right price is. Indeed, that US$10 decline in the price of oil, according to Capital Economics, would translate into 3-5 percent lower GDP in most Gulf states and 1.5-2 percent lower GDP in the UAE, Russia, and Nigeria.

While this is not the best of news, it seems the Gulf economies are quite resilient to oil price shocks. Capital Economics estimated that even if prices went lower, to US$40 a barrel and even US$30, some Gulf economies, including Saudi Arabia, the UAE, Kuwait, and Qatar would be able to plug their budget deficits from the forex reserves “for at least a decade”. One interesting point Capital Economics makes is that the UAE could fund its budget deficit “indefinitely,” which certainly sounds pretty bold. Related: Natural Gas Prices Fall Below Zero In Texas

The IMF, however, recently warned that Gulf economies remain vulnerable to oil price shocks. The fund acknowledged that in several countries, including Saudi Arabia and the UAE, higher oil revenues earlier this year had more than offset increases in public spending, “there is a tangible risk that the commitment to implement key fiscal measures and structural reforms will weaken amid higher oil prices.”

Now that prices have slumped again, these economies will get the necessary motivation to continue their diversification efforts, so they would be ultimately positive for them, as well. And yet, many seem to expect this price slump to be short-lived and prices to return to levels above US$50-60 a barrel.

Oil Price Information Service co-founder Tom Kloza, for one, told CNBC last week he expected prices to rebound before long as both Brent and WTI were currently being oversold. “Oil can be stabilized in December and will be helped by the higher demand as U.S. refiners ramp up to over 18-million barrels a day of crude use. A cold northern hemisphere winter juices up demand as well,” the analyst explained. Related: BP Is Comfortable With $50 Oil

What’s more, most analysts seem to expect OPEC to agree on a production cut of at least 1 million bpd and also most expect Russia to agree to join the cut despite its usual guardedness in making any definite announcements before the deadline, which this time is December 6 when the cartel will meet in Vienna.

This will push prices higher, probably prompting another critical tweet from President Trump, and once again put emerging economies under the twin pressure of expensive oil and costly dollars. But some, such as Morgan Stanley, don’t see the cut as a certainty. The investment bank estimates the likelihood of a cut agreement at 66 percent.

This means there is a good chance OPEC—and Russia, which hasn’t been enthusiastic about the idea of new cuts so far—pumping at current levels. And then that scenario of Capital Economics with oil at US$40 and even US$30 might materialize. The consequences would be interesting to watch in both emerging economies and oil exporters.

By Irina Slav for Oilprice.com

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  • John Brown on November 29 2018 said:
    If OPEC and Russia push prices back up rapidly all they are going to accomplish is slamming world economic growth, keep the U.S. shale oil industry going full speed ahead, and put them in an even worse situation than they are now. If they were smart they'd try and keep WTI stable around where it is & Brent under $60 for the next 6 months before trying to inch prices up. It their greed in pushing WTI to $75 that has started to strangle world Growth, kept the U.S. in a gold rush for shale oil and gas, and put them where they are now. Their is plenty of oil and gas even w Venezuela cratering under the Maduro communist tyranny, and sanctions on Iran. What happens if the Maduro murderous insanity is removed, Venezuela gets a Government again and starts reviving oil production, or Iran finally does something smart? Add one or either of those events into the mix along with more and more U.S. shale oils onto the market, without decent world economic growth, and oil will hit $20.
    Of course, GREED is a short term fixation and emotion. It doesn't plane for the long haul it wants to be quenched now, only as we've seen over and over with the oil markets the more the price rises the more GREED grows. Personally I hope they move WTI back to $75 or even higher. That means the U.S. produces more, Renewables keep gaining market share and have time to keep cutting their costs, and growth gets choked off and we get enough oil sloshing around it will be cheaper to fill your swimming pools with it rather than water.

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