x Abu Dhabi, UAEFriday 19 January 2018

Declining price of oil puts break-even in spotlight

A drop in oil prices threatens budgets in the GCC.

The price of oil continues its decline, dipping below US$100 per barrel and casting a new light on budgets across the GCC.

Since last year, governments in the GCC have embarked on extensive investment programmes to improve the welfare of citizens, or to boost economic development.

These moves have pushed up the break-even price of oil - the per barrel income that is needed to avoid a deficit - for almost all of them.

Multibillion-dollar spending plans for social housing, infrastructure or tourism were supported by a resurgent oil price, with Brent averaging $107 a barrel last year, according to calculations by Reuters.

Oil started this year strongly, with concern over the stand-off between Iran and the western powers pushing up the price. Since then, the resumption of negotiations between Tehran and the G8 economies has calmed nerves, while Europe's slide back into recession has cooled demand for oil markedly.

Calculations for break-even prices differ and estimates vary significantly.

Emirates NBD caused a stir when it predicted the UAE would need oil prices of $107 to balance the books. The IMF is more conservative, putting the country's break-even price at just above $80 a barrel.

The IMF has been more bearish on Kuwait, calling on the Gulf state to curb its government expenditure to bring its deficit under control.

If IMF calculations prove correct, Iraq and Bahrain will also start feeling the pinch; both countries rely on oil prices of about $100 a barrel to match income with expenditure.

On Friday, Brent dipped below the US$100 a barrel barrier, ending the week at $98.81 a barrel. Crude traded into the United States, meanwhile, has long ceased to fetch $100 a barrel, and closed at $83.23 a barrel on Friday.

The price of oil has declined, in part, due to the additional output by Gulf producers, with Saudi Arabia in particular pumping more crude to make up for reduced Iranian exports, and to reassure the oil markets. Additional output pushes down the break-even price, as increased volumes compensate for lower prices.

"Break-even prices are much higher than they were but this year [GCC producers] have been in quite a good position because they have been benefiting from a double-digit price and they have been able to raise production," said Liz Martins, a senior economist at HSBC.

Saudi Arabia overtook Russia as the world's biggest producer of oil in March, pumping an average of 9.923 million barrels per day (bpd), a 31-year high, according to data by the Joint Organisation Data Initiative. Abu Dhabi will, over time, likely push down the UAE's break-even price as the oil-rich emirate is planning to increase its production capacity from its current 2.8 million bpd to 3.5 million bpd by 2017.

This will aid the federal Government in its push to improve infrastructure, particularly in the Northern Emirates, and help Abu Dhabi continue ambitious plans to develop its airport capacity, the Saadiyat Cultural District and a raft of power, housing and healthcare schemes.

"Reducing expenditure to balance budgets may not be politically feasible, for example because of the need to diversify the economy and create jobs, and so if governments can afford it, they will maintain these programmes," said Farouk Soussa, the chief Middle East and North Afrcia economist at Citi.


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