Outlook gloomy for Middle East economies as oil prices plumb new depths

Prospects for regional economies are looking gloomy for next year as oil prices head to levels not seen since before China’s economy took flight in the early 2000s, according to a survey of financial analysts.

“The economic outlook for 2016 seems uncertain, with the vast majority of respondents [81 per cent] expecting low oil prices to impact the GCC economy,” said Amer Khansaheb, president of CFA Society Emirates, referring to the results of a survey by the institute of 200 financial analysts in Bahrain, Kuwait and the UAE.

The survey was conducted from late October to early last month, before the latest plunge in oil prices, which has since taken benchmark North Sea Brent down another 20 per cent.

Brent closed down US$1.80 on Friday at $37.93 a barrel, the lowest level since mid-2004 and 67 per cent below last year’s high of about $115 a barrel.

A monthly oil market report on Friday by the International Energy Agency, the rich consuming countries’ main energy think tank, reiterated what has been apparent for some months: the oil market is set for a prolonged period of low oil prices until the Saudi Arabian-led policy to maximise production succeeds in drying up high-cost supply and allows refiners to sop up the record oil glut.

“There is evidence the Saudi-led strategy is starting to work,” the IEA report asserted.

“Lower prices are clearly taking a toll on non-Opec supply, with annual growth shrinking below 300,000 barrels per day in November from 2.2 million bpd at the start of the year.” Supply from non-Opec producers is forecast to start contracting next year.

Demand also has been spurred on by lower oil prices and the IEA sees demand growth remaining healthy next year, at about 1.2 million bpd, though the pace of growth will have slowed a bit from this year.

The longer-term outlook is for supply to continue shrink.

“As companies make further spending cuts in reaction to sub-$50-a-barrel oil the impact on supplies – both from non-Opec and Opec – will be even more pronounced in the longer term,” the IEA predicts.

But the market has been so oversupplied recently that momentum will mean it remains under pressure next year, especially if additional supply comes on the market from Iran, assuming it completes the process to lift sanctions related to its nuclear programme.

The governments in the GCC, meanwhile, are under pressure cut spending and increase their non-oil revenue sources to keep fiscal deficits from ballooning.

One such measure would be a move to introduce GCC-wide value-added taxes (VAT) on selected consumer items, though such a scheme is not expected until 2018 at the earliest.

Still, the analysts surveyed by the CFA were worried about the possibility of VAT, with 61 per cent concerned it would increase the cost of doing business in the region and 17 per cent saying it could deter ­investment.


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