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Global Markets: 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.

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.

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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