Rising prices: Oil's well that ends well

World oil market is expected to see a partial recovery in 2017 and 2018 in light of the Opec and non-Opec output cuts of 1.8 million barrels per day, Arab Monetary Fund (AMF) said in its Arab Economic Outlook.

While the production cuts will help bring an oil market balance in 2017, oil demand is expected to increase by 1.2 million barrel per day this year, the AEO report said.

"These developments will support oil price increases in 2017 and 2018, compared to levels recorded in 2016 which reached $40.8 per barrel for the Opec price basket. However, the expected increase in shale oil production due to the price gains will limit the upward trend of oil prices during 2017 and 2018," the report said.

Mihir Kapadia, CEO and founder of Sun Global Investments, said: "We are now half way into the six month period of planned production cutbacks by Opec and its allied partners. Over this period, we have witnessed relative stability in the oil market. Earlier this week, Saudi Arabia indicated it could extend the production cutback period by a further six months. If this happens, it would help to support prices in the medium term."

The AMF said in 2017 and 2018, liquidity pressures in the Arab oil-exporting countries are expected to ease in light of the anticipated rise in oil prices, which will support the level of deposits and provide an opportunity to channel greater credit to non-oil sectors to increase output and economic diversification levels.

"This trend will partially offset the contraction impact resulted from the tightening of monetary policy in some Arab countries that adopt a fixed exchange rate regime against the dollar," it said. "In the oil-importing Arab countries it is expected that some of these countries will continue to be affected by the tight conditions of domestic and external financing, especially in the light of the expected increase in US interest rates and the relatively high interest rates levels in some of these countries. The improvement in monetary conditions in this group of countries will continue to depend on the increase in external demand levels, which will support net foreign assets, help to provide domestic credit and reduce interest rates, as well as containing pressures on the foreign exchange markets," it said.

The report noted that public spending continued to decline by six per cent compared to nine per cent for the decline recorded in 2015 reflecting the continuation of the fiscal discipline reforms efforts.

"The increase in public spending in other Arab oil-exporting countries has limited the declining trend of public spending at the level of Arab countries as a group. As a result, the consolidated budget deficit of Arab countries as a group declined to 10.3 per cent of the GDP compared to 11.4 per cent of the GDP in 2015."

In light of the expected recovery of oil prices, the anticipated improvement in economic conditions in many Arab countries and the continuation of the gradual implementation of fiscal reforms in 2017 and 2018, the consolidated budget deficit of Arab countries as a group is expected to decline to 6.3 per cent in 2017 and 5.1 per cent in 2018, AMF said in its report.

"We're at a bit of a crossroads here," John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy, said by telephone. "The IEA said that global inventories are on the cusp of declining. At the same time, they may have underestimated the growth of US production."

With the increasing rig count pointing to rising supply, Tony Headrick, energy market analyst at CHS Hedging, said Opec would be watching. "Ultimately Opec is viewing it as a point of discussion in terms of whether or not they look to extend cuts," Headrick said.

Analysts at Capital Economics said the good news is that the worst of the slowdown in the Gulf's non-oil sectors appears to be over. "Fiscal policy should become less restrictive in most places. Indeed, Saudi Arabia's latest budget pointed to a broadly neutral fiscal stance following two years of harsh austerity."

The AEO report expects that during the year 2017, the deficit in the current account of Arab countries as a group will shrink to about $63 billion, representing 2.5 per cent of GDP.

This is due to the expected improvement in international oil prices, commodities and minerals. In addition to the expected increase in tourism proceeds in light of the improved internal conditions and efforts exerted in some Arab countries to encourage tourism sector.

With regard to 2018, it is expected that in light of the continued gradual improvement of international oil prices, the deficit in the Arab countries' current account as a group will be about $27.6 billion, representing about one per cent of GDP.

Source: Khaleej Times