The main take away from the recent events for the Middle East and North Africa (Mena) is the big surge in levels of public spending pushing up the budget breakeven price of oil for Gulf countries, according to economists and oil sector analysts.
“We estimate the fiscal support packages announced amount to 7.6 per cent of 2011 estimated regional gross domestic product [GDP], the bulk of which comes from Saudi Arabia. As a result, we now see GCC growing by 5.2 per cent in 2011, revised up from 4.7 per cent,” said Turker Hamzaoglu, an economist with Merrill Lynch.
Analysts said the geopolitical risks and the potential contagion from the regional turmoil have decreased for now. “While the absence of a dialogue and political concessions represent a medium-term risk, the situation is highly unlikely to generate further negative headlines in the short term,” said Hamzaoglu.
The huge pubic spending programmes announced by Gulf governments are expected to accelerate growth rates, but have pushed up the previously budgeted breakeven oil prices. “In Saudi Arabia, in particular, the massive fiscal spending spree announced year to date has reached almost $120 billion, up by about 25 per cent of 2011 GDP. We estimate this has moved the breakeven oil price for the Saudi budget for 2011 to $95 per barrel,” said Francisco Blanch, a Commodity Strategist with Merrill Lynch.
Despite the rising budgeted break even oil prices, analysts believe that Gulf States do not face a potential surge in budget deficits as oil prices are likely to keep pace with the spending requirements. Although the political risk perception of the region has subsided, with the spread of protests in countries such as Yemen and Syria, it is widely anticipated that risk premiums on oil remains high in the short to medium term.
“To reflect a tighter market, we recently upgraded our average 2011 second quarter Brent crude oil forecast to $122 per barrel from $86 per barrel, and we believe prices could temporarily break through $140 per barrel during the next three months,” said Blanch.
The clear winners in some way are ‘relatively safe’ countries such as Qatar, the UAE and Kuwait that should benefit from higher oil prices and little tension at home. In the UAE’s case, recovering global demand is also a plus.
“While Saudi’s risk premium has increased in the markets with the situation in Bahrain and the Eastern province, we are very comfortable that the country will effectively put the crisis of legitimacy to sleep for now. Meanwhile, the $120 billion fiscal spending package and the increased oil production is a clear and strong push for the economy,” said Hamzaoglu.
Last week Standard Chartered economists said that Abu Dhabi and Qatar are benefiting from the surge in oil prices as a result of the regional political turmoil while Dubai has benefited due to capital looking for save haven.