Arab Gulf Producers Are in Need of Much Higher Oil Prices

After a brief reversal on Monday, the oil price rally was back on track on Tuesday as tensions in the Middle East reached fever point.

Brent crude for November delivery was up 1.4% to trade at $74.93 per barrel at 13.10 pm ET while WTI crude for October delivery rallied by a similar margin to change hands at $71.33 per barrel.

Last week, Israel launched an unprecedented pager and walkie-talkie attack on Hezbollah’s communications that injured thousands of the organization’s militia and operatives. The assault was quickly followed by the assassination of Ibrahim Aqil, a key Hezbollah leader before Israel targeted senior Hezbollah leader Ali Karaki, the head of the southern front, whose fate remains unknown. Israel’s strikes in southern Lebanon have claimed nearly 500 lives and increased the threat of this escalating into a regional war.

The majority of Gulf oil and gas heavyweights are not celebrating the latest rally.

After enjoying a rare budget surplus in 2022, most Gulf Cooperation Council (GCC) economies are seeing their budget deficits widen with current oil prices still well below what they require to balance their budgets.

According to the IMF, Saudi Arabia, the GCC’s biggest economy, needs an oil price of $96.20 per barrel to balance its books, thanks in large part to MBS’ ambitious Vision 2030. The situation is not helped by the fact that over the past few years, the oil-rich nation has borne the lion’s share of OPEC+ production cuts after agreeing to cut 1 million barrels per day or nearly half of the group’s 2.2 mb/d in pledged cuts. In effect, Saudi Arabia has been selling less oil at lower prices, thus compounding the revenue shortfall.

But it’s not all doom and gloom. Vision 2030 is all about diversifying Saudi Arabia’s economy and making it less susceptible to oil price shocks.

And, it appears to be working: Saudi Arabia’s Ministry of Economy and Planning revealed that non-oil revenues hit 50% of the Kingdom’s gross domestic product (GDP) in 2023, the highest level ever.

The country’s non-oil economy was valued at 1.7 trillion Saudi Riyals (approximately 453 billion U.S. dollars) at constant prices, driven by steady growth in exports, investment and consumer spending.

Last year, the Kingdom’s private-sector investments expanded by a brisk 57 percent, reaching a record high of 959 billion Saudi Riyals (254 billion dollars) while arts & entertainment and real service exports grew in triple-digits to the tune of 106 percent and 319 percent, respectively, reflecting the Kingdom’s transformation into a global destination for tourism and entertainment. Meanwhile, the food sector recorded 77 percent growth; transport and storage services grew 29 percent, health and education recorded growth of 10.8 percent, trade, restaurants and hotels at 7 percent while transport and communications increased 3.7 percent.

As you might expect, rapidly diversifying the economy comes at a steep price, with the IMF saying Saudi Arabia now needs oil prices more than $20/barrel higher than current levels.

“At least until 2030, Saudi will have massive budgetary needs due to the need to demonstrate some significant outcome in key Vision 2030 projects and to prepare for and host big sporting and cultural events,” Middle East Institute scholar Li-Chen Sim told CNBC.

However, as OilPrice.com contributor Irina Slav has noted, Saudi Arabia can simply slam the brakes on Vision 2030, maybe turn it to Vision 2040 or even Vision 2050 if oil markets refuse to cooperate.

But Vision 2030 is not solely to blame here. The IMF estimates that Bahrain and Algeria require oil prices of $125.7 per barrel to achieve budgetary equilibrium; Iraq $93.8, and Kuwait $83.5 per barrel to avoid deficits. Of the six GCC nations, only the UAE and Oman are expected to record a surplus.

Fitch has projected the UAE fiscal breakeven oil price will average $64/bbl in 2024-2026, although Abu Dhabi’s dividend plans could throw a spanner in the mix here, with higher payouts reducing that average price. The consolidated surplus will clock in at 3.3% of GDP in 2025 and 2.6% in 2026.

Fitch has also predicted that Oman will record a budget surplus, although the surplus will narrow to 2.2% of GDP in 2024 and 0.9% in 2025 from 3.2% in 2023.

Economic Slowdown

Back in July, a Reuters poll of economists predicted that GCC economies will grow at a considerably slower clip in the current year due to the ongoing oil production cuts, with Saudi Arabia’s economy among the hardest hit. A poll of 24 economists taken July 8-22 has predicted that Saudi Arabia’s economy will expand 1.3% in the current year, down from 1.9% forecast in an April survey and 3.0% predicted in January.

However, the United Arab Emirates (UAE), is expected to post a better growth rate at 3.7%  as it soon ramps up oil production and continues to focus on tourism. Kuwait is expected to remain in a recession this year while  Qatar, Oman and Bahrain are seen growing 2.2%, 1.6% and 2.6%, respectively. Overall, GCC economies are expected to average 1.9% growth in 2024.

“Lower oil revenues are impacting non-oil growth. Saudi Arabia is in the process of an overhaul of Vision 2030 and adjusting investment spending…The impact on real GDP growth is clear – less investment means a more moderate growth outlook,” Ralf Wiegert, director of MENA economics at S&P Global Market Intelligence, has said.

The GCC outlook for 2025 is brighter, with the Saudi economy expected to expand 4.5% in 2025 while the UAE is expected to grow 4.2%. Further, the region is expected to continue seeing a modest inflation rate, with median forecasts ranging between 1.0% and 3.0% in 2024, including the lowest in Oman and the highest in Kuwait. Saudi Arabia is expected to post an inflation rate of 2.1% this year.