Issue 14 - Multiples Group

Jun 14, 2017 - top producer in 2017 as result of Donald. Trump win in elections. ➢ On the other hand, the top exporter is ... oil market and expand its oil production to 3.6 million barrels per day. This major increase in world oil ... oil production from 30 million barrels per day to keep the market share despite the decline in oil.
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Issue 14 June, 2017

Oil Prices and the Impact on GCC Countries

Table of Contents

Introduction Q1 What is the historical and forecasted oil price? And who are the top oil producers? Q2 What are the factors contributing to the decline in oil prices? Q3 What is the impact of falling oil prices on GCC countries?

Q4 What are the challenges facing GCC countries and how are they reacting? Conclusion

1

Introduction

The drop in oil prices has severely affected the countries of the Gulf Cooperation Council (GCC). This has lowered government revenues and in return negatively affected spending plans. Oil prices decline is expected to continue in spite of the GCC governments efforts to support non-oil sector revenues to fund their spending programs and reinforce the regional economic growth and diversification. In addition, the oil price drop has negatively impacted the RHC sector (real estate, hospitality and construction) across the GCC with a slowdown that is expected to continue over the next few years. However, the governments commitment to host mega events, such as Expo 2020 Dubai, 2022 FIFA World Cup Qatar and various national initiatives of the GCC governments should boost that sector as well as the overall economy performance.

2

What is the historical and forecasted oil price? And who are the top oil producers? Question 1

History and Forecast In 1980 was the peak, oil prices increased to 109 USD

Brent Crude Oil Prices USD per Barrel (1970-2020E)

120

Increased in 2008 reaching 102 USD

Decline started in 2015 reaching 50.8 and will continue declining until 2020

100 80 60

1986 to 2003 witnessed a huge decline in oil prices with average 32 USD In 90s First Gulf War: oil prices dropped by 48%

First boom after War 73

40 20

In 80s OPEC abandons

1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017E 2018E 2019E 2020E

0

➢ Global oil prices had declined during the second half of 2014 and continued to fall downward reaching 43 USD per barrel in 2016. ➢ Oil prices are expected to slightly increase in 2017 reaching 53.2 USD per barrel, with no significant increase expected during the next few years 2018-2020.

3

What is the historical and forecasted oil price? And who are the top oil producers? Question 1

Top Oil Producers & Exporters

Top Oil Producers (2016, million barrels per day) 11.7

12.5 11.1

10.4

2016 4.1

Saudi Arabia

Top Oil Producers (Expected in 2017, million barrels)

United States

Russia

China

3.8

Canada

11.5

2017E

10

4.7 3.5

Iran

3.2

2.97

2.93

2.79

UAE

Iraq

Mexico

kuwait

U.S.

Russia

Saudi Arabia

Canada

4.5

Iraq

3.9

China

3.8

Iran

3

2.8

2.7

2.3

UAE

Brazil

Kuwait

Mexico

Top Crude Oil Exporters by Country (2016, BN USD) 136.2 73.7 46.3 39.5 38.9 30.7 29.1

4

27

25.2 22.6 20.4 19.4 15.5 14.6 13.3

➢ The top oil producer in 2016 was Saudi Arabia, while in 2017 U.S was the top followed by Saudi Arabia. U.S will be the top producer in 2017 as result of Donald Trump win in elections. ➢ On the other hand, the top exporter is Saudi Arabia.

Question 2

5

What are the factors contributing to the decline in oil prices?

Global Slowdown

Iran Nuclear Deal

Shale Gas Revolution

OPEC

The global recession and very low rates of economic growth in most of industrialized countries and the emerging economies significantly contributed to lowering the oil prices.

Signing the US-Iran nuclear deal in 2015 paved the way for removing the international sanctions against Iran, and this allowed Iran to return to oil market and expand its oil production to 3.6 million barrels per day. This major increase in world oil supply has led to a large surplus in oil supply.

The surge in natural gas production crashed prices, fueling a huge increase in activity in petrochemicals and causing a major switch from coal to natural gas in the electric power industry.

OPEC and Saudi Arabia have decided not to cut oil production from 30 million barrels per day to keep the market share despite the decline in oil prices.

Question 3

What is the impact of falling oil prices on GCC countries? OPEC Members' Values of Petroleum Exports

400,000 350,000 300,000 250,000 200,000 150,000 100,000 50,000 0 Saudi Arabia

UAE

Kuwait 2011

Iran 2012

2013

Iraq 2014

Libya

Qatar

2015

Saudi Arabia remains to be the top OPEC country in terms of petroleum exports despite the drop throughout the years 2011-2015

Source: OPEC Annual Statistical Bulletin

GCC Countries Fiscal Revenues (Surplus/Deficit) (%) 10.80%

10.80% 3.10%

2012

2013

2014

2015

2016

-9.40%

-9.80%

2017E -6.90%

6

Source: IMF

Question 3

What is the impact of falling oil prices on GCC countries? GDP Growth by GCC Country (%) 11.9%

4.0% 1.2% 1.9% Saudi Arabia

3.9% 2.4%

UAE

2.6%

3.4% 2.4%

3.4%

2.6%

Kuwait 2005-2015 (Average)

3.4%

Qatar 2016

4.8% 1.8% Oman

2017E

1.7%

4.9% 2.2% Bahrain

2.0%

➢ According to the International Monetary Fund (IMF), GDP growth in GCC countries is forecasted to average +2.3% in 2017. ➢ Growth will be influenced by oil price, which is expected to be around 51 USD/ barrel in 2017.

Source: IMF

➢ Saudi Arabia is considered the most important oil exporter in the world as it produces about 11 million barrels per day. ➢ Sharp decline in government revenues as a result of the decline in oil prices. ➢ Saudi Arabia faces a budget deficit representing 20% of GDP and the Kingdom has been forced to liquidate 70 BN USD worth of foreign reserves ➢ UAE is one of the most diversified economies among the GCC, which has proven resilient to falling oil prices. The non-oil private sector has shown strong growth fueled by domestic demand and tourism, especially in Dubai. Domestic demand is powered by strong retail sales. ➢ However, government deposits at domestic banks have declined by 50 BN AED (13.6 BN USD).

7

What are the challenges facing GCC countries and how are they reacting?

Question 4

The fiscal deficit of GCC aggregate countries is expected to reach 8.4% of the GDP in 2016 from 7.9% in 2015, marking the largest deficit in the history of the GCC.

Bahrain and Oman have experienced low growth, owing to fewer financial buffers. Meanwhile, Kuwait, Qatar and the UAE comparatively have more financial assets to support them over the short to medium term.

8

Challenges

GCC economies are predicted to grow by 2.6% in 2017.

Economic diversification, increased global trade and foreign assets are the prime focus of the governments in the GCC region.

In the case of banks, liquidity could tighten due to the decrease in oil-related bank deposits and an increase in nonperforming loans (NPLs). However, they are well-cushioned to absorb the shocks.

What are the challenges facing GCC countries and how are they reacting?

Question 4

How are they reacting? ➢ Non-oil revenue will increase to 530 BN SAR (141 BN USD) by 2020 from 163.5 BN SAR. Public-sector wages and salaries will fall to 456 BN SAR from 480 billion, and make up 40% of total spending. ➢ Oil output capacity is expected to stay at 12.5 million barrels per day by 2020, with refining capacity rising to 3.3 million barrels per day from 2.9 million.

➢ UAE is considered the most diversified economy in the region, driven by vision 2021, which seeks to establish the UAE as one of the most competitive countries in the world, supported by sustainable and diversified economy. In addition, UAE is trying to estimate all possible scenarios of oil reliance and reduce the oil contribution of the oil sector in the economy to 20% of GDP by 2020. ➢ The Sultanate’s oil wealth has been a traditional pillar of growth of the economy which approximates to 90% of government revenues and accounts for more than 50% of GDP; however, the government has been actively making efforts to diversify its reliance on oil sector and focus on other sectors. ➢ Bahrain, with higher break-even levels and lower fiscal reserves, face high challenges.

9

Conclusion

Despite price fluctuations throughout the years, oil continues to be a major contributor to economic performance in the GCC. However, economic diversification is vital for the Gulf countries to ensure sustainable economic growth. Some countries have already taken measures and national reforms to lessen the dependencies on oil, such as Saudi National Transformation Program and the like. The question remains on how sustainable are these efforts to hedge against the impact of the falling oil prices along with other strategic deals such as arms deals with huge government spending.

10

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