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Gulf to see revenue boost from oil price uplift, Russia embargo

Natalya Letunova/UNSPLASH
  • Markets are primed for further increases in the coming weeks
  • UAE and Saudi Arabia should reap the benefits of increased hydrocarbons revenues

EU leaders have said they will block most Russian oil imports by the end of the year, a move expected to keep oil prices at their highest since the last peak in 2014 and buoy GCC economies.

Global oil prices exceeded US$120 per barrel on Monday amid supply constraints and high demand, and analysts told AGBI the market will remain bullish until at least the second half of the year.

“For Q2 and Q3 2022 we are expecting to see an average of $120 per barrel, which would imply the markets are primed for further increases in the coming weeks as supply tightens considerably,” said Edward Bell, senior director of market economics at Dubai-based bank Emirates NBD.

Russia supplies 27% of the EU’s imported oil and 40% of its gas, and the EU pays Russia around US$430bn a year in return. The EU-wide ban announced on Tuesday will impact oil that arrives by sea but not pipeline oil – representing around two-thirds of Russian imports.

Brent, the benchmark for two-thirds of the world’s oil, was up 1.68 per cent at $123.70 by 2.30pm UK time on Tuesday, the biggest rebound since it reached nearly $140 in March. Meanwhile, West Texas Intermediate (WTI), which tracks US crude, rose 3.44 per cent to $119 per barrel.

Russia now has two choices, according to Bell. These are to try and offload the circa-two million barrels a day of blocked crude to nations unaffected by the embargo, such as China and other Asian countries, or simply to halt production.

The latter is far more likely given current slow demand in China as it grapples with ongoing coronavirus lockdowns, he said.

Sustained higher oil prices could cloud this year’s global economic outlook, but MENA oil producing nations – especially the biggest, Saudi Arabia and the UAE – will reap the benefits of increased hydrocarbons revenues, said Joseph Gatdula, head of oil and gas analysis for Fitch Solutions.

“The key themes for Mena oil producers are very strong GDP growth – likely the strongest in 11 years – which means increased liquidity for sovereign wealth funds, buoyant M&A activity and, in the case of Saudi Arabia, healthy financial support for its pipeline of mega-projects.

“For the UAE, higher oil prices will shore up business sentiment and consumer confidence, and mean more funding is available to invest in economic diversification initiatives,” Gatdula said

Stronger returns for GCC governments

Higher oil prices are “certainly a good thing for GCC economies as it translates into stronger returns for governments and greater scope for reinvestment,” agreed Sudharsan Sarathy, MENA lead analyst for oil and shipping research at market data provider Refinitiv.

The situation will be “challenging for the only two Gulf nations with meaningful spare capacity”, namely the UAE and Saudi Arabia, he said, as they are prevented from significantly ramping up production to take advantage of the global price hike by an agreement of the Opec+ alliance led by Saudi and Russia to only gradually unwind supply cuts made during the Covid pandemic.

Opec+ agreed this month to stick to plans to raise production by only 432,000 barrels a day from June. Any more and the ensuing fallout with Russia would lead the producer to exit the alliance, Opec+ fears. However, the agreement expires in September, which could lead members to raise production with a cooling effect on global oil prices later in the year.

But Gatdula told AGBI that the GCC has a “pragmatic approach” to economic diversification based on global oil prices hovering at a healthy $100 per barrel. An extra $20 or even more will not prompt them to dramatically alter their agendas in favour of greater reliance on hydrocarbons, he explained.

Still, uncertainties remain around the timing and duration of the Russian embargo, and the responses of other major global oil producers such as the US and Venezuela, which could further impact energy markets and lead to continued short-term volatility, the analysts noted.