What Does the Drop in Oil Price Mean for Middle East Economies?

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On Saturday the OPEC+ group of oil and petroleum-rich countries agreed to extend the cuts in oil production until the end of July. The agreement seems likely to hold as Iraq and Nigeria, who have previously been non-compliant on oil reduction agreements, have stepped in line with the group’s plans.

Iraq has asked Asian refineries to forego certain shipments of crude oil, suggesting that Iraq has made steps to comply with the OPEC+ agreement. On Tuesday, in a phone call with his Saudi counterpart, Iraq’s new Oil Minister, Ihsan Abdul Jabbar Ismaael, said “its commitment to the voluntary oil production adjustments of June and July 2020, as well as the voluntary adjustments for the period following the end of July, despite the economic and financial challenges.”

These economic challenges could be widespread and damaging. For the countries that form the Gulf Cooperation Council (GCC) – Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the UAE – the fall out from what the World Bank has called the “dual shock” of Covid-19 and the collapse in oil prices could mean that living standards decrease and government spending runs into large deficits. 

The American credit rating agency Fitch Ratings now expects most GCC countries to post fiscal deficits of between 15%-25% of GDP in 2020

The American credit rating agency Fitch Ratings now expects most GCC countries to post fiscal deficits of between 15%-25% of GDP in 2020. Qatar is expected to do slightly better, with a deficit of around 8% of GDP. A further decrease of 10 USD could lead to deficits increasing by up to 6%.

Spending cuts are likely to be implemented in the countries with weakest economies. This could bolster a pending recession and see a 1% decline in the non-oil sector in Kuwait to a 5% decline in Oman. Fitch Ratings points out that this would be “unprecedented in the recent history of the GCC states and heighten social security risks.”

But the OPEC+ agreement may have inadvertently led to a further drop in oil prices as markets closed on Tuesday. Although Gulf producers have remained committed to OPEC+’s commitment to reduce oil supplies until the end of July, Saudi Arabia, Kuwait, and the UAE have suggested that they may not extend cuts beyond the targets of the agreement.

Although Gulf producers have remained committed to OPEC+’s commitment to reduce oil supplies until the end of July, Saudi Arabia, Kuwait, and the UAE have suggested that they may not extend cuts beyond the targets of the agreement.

A strong US dollar has also forced prices down for the GCC nations which could lead to further economic hardships.

To compound the issue even further, the restarting of oil production at Libya’s El-Sharara oilfield a few days ago could have affected prices as the possibility of an extra 300,000 barrels of crude oil per day being put onto the market, further pushing prices down. 

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