Already suffering from low prices, oil producers have suffered a body blow from the coronavirus pandemic, as global demand suddenly fell away. We look at the outlook for the Gulf states, South America and other key oil-producing nations. 

Oil price drop

Even before the impact of the global coronavirus pandemic, oil producers faced mounting challenges at the start of 2020.

While average prices for 2019 were below those of 2018, the Organisation of Petroleum Exporting Countries-Plus (OPEC+) alliance – formed by Saudi Arabia and Russia in late 2016 – had ensured a stability of sorts in the market, with prices little changed at the end of the year compared with the start.

Yet despite initial hopes for higher demand on the back of a more positive outlook for the global economy in 2020, analysts predicted a softening of prices for the year, citing a steady growth in production from US shale producers, coupled with initial signs of the weakening of the OPEC+ consensus leading to predictions of oversupply.

“Notwithstanding more benign global macro conditions, oil prices are set for a softer year,” said Ehsan Khoman, head of Middle East and North Africa research and strategy at MUFG in a research note in early January 2020, forecasting that fresh supply cuts agreed by OPEC+ in December would not be sufficient to balance the market. “It is thus difficult to expect any sustained rise in prices and all too easy to envisage a fall.”

Unexpected shock

Such concerns now seem somewhat trivial, however, compared to the impact of the coronavirus on the world economy from March onwards. The swift imposition of the most drastic lockdown measures witnessed in a generation wiped out demand for oil virtually overnight, sending prices plummeting.

The dramatic fall in prices focused producers’ minds following a dramatic, but ultimately short-lived, price war between Russia and Saudi Arabia in early March. Yet even a historic agreement, struck in early April between both OPEC+ and US shale producers to remove an unprecedented 10 million barrels of oil from the market, did little to lift prices.

“Unlike before, this is not an oil price shock caused by excess supply that is a boon for everyone else,” says Tatiana Lysenko, lead economist for emerging markets at S&P Global Ratings. “The fall in price this time around is largely a symptom of the Covid-19 outbreak, causing a massive collapse in demand.”

And while this is hardly the first time the industry has had to deal with price fluctuations – with the last major shock as recent as 2014 – both the scale and the timing of the crisis are particularly serious for producers.

“Oil-producing countries come into this current crisis in a much weaker position, having had six previous years of relatively weak prices in which they have eroded their fiscal defences, made most of the ‘easy’ cost cuts and already made substantial production cuts,” says Robin Mills, CEO of Qamar Energy.

Slow recovery

The cuts agreed by OPEC+ and others in April have begun to have an impact on the market, with Brent recovering to just over $30 per barrel in early May, after falling below $20 in late April. Saudi Arabia has since pledged to go even further to bolster prices, pledging to cut a further 1 million barrels of supply from early June.

But even as some of the world’s largest economies tentatively begin to ease their lockdowns, the prospect of further outbreaks – and the temptation for individual producers to break the April agreement in search of additional market share – make a return to $60 oil prices a very distant prospect, according to Mr Mills.

S&P forecasts that Brent crude, which stood at just below $70 at the start of the year, will recover to an average of just $50 next year and to $55 in 2022. 

Faced with such a slow recovery in prices, oil producing nations in both the developed world and emerging markets face hard questions about the impact on budgets for 2020/21 and beyond.

Riyadh’s restrictions

Over the years, oil producers in the Gulf Co-operation Council (GCC), which includes major producers such as Saudi Arabia, Kuwait and the United Arab Emirates (UAE), have sought to use the enormous sums earned from oil and gas revenues to build up significant capital buffers and diversify their economies to cushion the impact of periods of lower oil prices.

Such policies are likely to cushion the impact of the crisis in the short term, according to William Jackson, chief emerging markets economist at Capital Economics. “GCC economies will clearly suffer a large loss of revenues, but have large savings to tide them over and make the adjustment gradually,” he says.

Yet even such buffers, coupled with the ongoing availability of capital via local and international debt markets – Saudi Arabia, Qatar and Abu Dhabi have all tapped the markets for multibillion-dollar bond issues since the crisis began – are unlikely to be enough on their own.

Saudi Arabia’s 2020 budget envisioned a 2.6% drop in spending based on an average oil price of around $58 per barrel; in March, it announced a spending cut of SR50bn ($13.32bn), around 5% of its budget.

But after its foreign reserves fell by $27bn to their lowest level in two decades in March, the country announced further dramatic austerity measures, including a trebling of value added tax to 15% and the suspension of a lucrative and politically sensitive cost-of-living allowance for government employees.

The rapid escalation of fiscal consolidation in Saudi Arabia echoes moves taken by Russia in recent years, after the sudden fall in oil prices in 2014. “Since 2015, the [Russian] government has pursued a strategy of fiscal austerity and a weak exchange rate to make sure that the country’s balance sheets are as strong as possible,” says Mr Jackson.

“Western sanctions also played a role – Russian policy-makers have been shaping the economy to survive without access to Western capital markets. The result is that while this oil price collapse has been painful, we haven’t seen the turmoil in Russia’s financial markets and banking system that we saw in 2008 and in 2015.”

Breaking point

The impact of the crisis is likely to be particularly pronounced in countries where existing debt levels were high prior to the crisis. “Venezuela’s economic and humanitarian crisis will, of course, get worse,” says Mr Jackson. “But there are also economies like Ecuador, Nigeria, Ghana and Angola, which had much weaker balance sheets coming into this crisis.” 

Once one of the world’s largest producers, Venezuela’s oil industry has collapsed due to years of chronic underinvestment. Having once collected $100bn a year in oil revenues, the country’s receipts this year may be as low as $4bn, deepening problems for the indebted nation.

Until the start of 2020, Ecuador had been an OPEC member producing about 545,000 barrels of oil per day. In mid-April, it reached an agreement with bondholders to suspend debt repayments worth $811m for the next four months, with lower oil prices putting pressure on the country’s already strained finances.

”Beyond Ecuador, the debt risks look most acute in Angola. It will suffer a larger loss of income and its public debt was highest to start with,” says Mr Jackson.

Angola, the second largest oil producer in Africa behind Nigeria, saw its public debt (including the debt of state-oil company Sonangol) rise to around 111% of gross domestic product (GDP) in late 2019. The country derives more than 25% of government revenue from oil.

Capital Economics predicts that Angola will have little choice but to pursue a debt restructuring, possibly with International Monetary Fund (IMF) assistance, due to the impact of lower prices, with output set to fall as much as 6% in 2020.

With the period of depressed oil prices likely to continue for some time, Angola is unlikely to be the last oil producer to seek help before the crisis is over.

Nigeria pleads for debt forgiveness

Alongside Angola, Nigeria’s economy is likely to be one of the hardest hit across emerging markets by the recent plunge in prices. 

The west African country is the continent’s largest economy and its largest oil producer. Oil exports account for more than half of government revenues and about 90% of its foreign exchange earnings.

Yet the high average cost of production in the country – standing at an average of $30 per barrel in late 2019 (compared with less than $10 for Kuwait and the UAE) – leaves its economy particularly vulnerable to oil price shocks.

While GDP growth recovered to 2.2% in 2019 from 1.9% in 2018, the IMF warned in February that the country’s external vulnerabilities were increasing, “reflecting a higher current account deficit and declining reserves that remain highly vulnerable to capital flow reversals”.

The collapse in prices in March has seen Nigeria selling oil for less than the cost of production, blowing a hole in the country’s spending plans for the year. Rating agencies Fitch and S&P both downgraded the country’s credit rating following the drop in prices, while Moody’s warned that risks to its creditworthiness had increased.

The government, whose original budget for 2020 envisaged an average oil price of $57 per barrel, has been forced to cut its spending plans twice since prices began their fall. The government announced spending cuts of N1500bn ($3.8bn) in early March, followed up by a further N750bn of cuts in May.

Such measures are widely seen as insufficient to meet Nigeria’s debt obligations, however. Finance minister Zainab Ahmed has said the country is seeking the suspension of certain debt payments due later this year, while president Muhammadu Buhari has gone so far as to ask for international lenders to cancel Nigeria’s debt obligations altogether.

The country agreed a $3.4bn loan from the IMF in late April, and is seeking further funding from the World Bank and the African Development Bank.

Norway raids its savings

Norway is one of the few oil producers that has, over many decades, avoided being hit by the so-called resource curse. Since the 1950s, abundant offshore oil and natural gas reserves have been managed with an eye on longer-term development.

As a result, the authorities in Oslo have constructed an economic model that is relatively well diversified. Nevertheless, the energy sector continues to play a significant role in the economy. Norway is one of the world’s top seven oil exporters, while the oil and gas sector accounted for about 18% of GDP and 62% of exports in 2018, according to data from the European Commission.

The national oil fund, the Government Pension Fund Global (GPFG), is at the heart of Norway’s successful management of its hydrocarbon deposits. Established in 1990, the fund was created as a repository for oil and gas revenue in order to avoid the economic distortions that can arise from a dominant hydrocarbon industry.

Today, the GPFG is the world’s largest sovereign wealth fund, boasting about $1100bn of foreign-owned assets. It also plays a vital role in financing Norwegian government expenditure, accounting for about 20% of the total government budget, though strict rules exist that limit annual withdrawals to 3% of its value.

But the collapse of global oil prices has forced the Norwegian government to rethink its expenditure in 2020. It has announced a withdrawal equivalent to 4.2% of the fund’s value, from an original figure of 2.6%. The last time Norway exceeded this limit was during the global financial crisis of 2007/08. Meanwhile, oil production cuts of 250,000 barrels a day in June, followed by a further cut of 134,000 barrels a day in the July-December period, have been announced.

Brazil’s ‘pre-salt’ ambitions on hold

Oil has played an important part in Brazil’s economy since the first discovery in 1939. Recent finds had put the Latin American country on track to become one of the world’s largest producers – until 2020’s oil price crash.

Brazil’s ‘pre-salt’ oil is costly to extract. Nearly all of it is offshore, with the new reservoirs located under up to 2km of water, 5km of solid rock and a further 2km of salt. This last layer makes extraction particularly arduous from a technical point of view. Pre-salt oil is among the most expensive types to surface and, in Brazil’s case, the break-even cost during the development phase is between $35 and $45 per barrel. Although this might fall to around $21 once in production, according to Capital Economics, it remains more than twice the price of Saudi Arabia’s, and only a sliver under the crude oil price in mid May ($25.92 at 17:29 BST on May 12).

At the time, the 2006 ‘pre-salt’ oil discoveries were considered the most impressive in decades. As recently as the end of 2019, the development was expected to turn Brazil from the ninth into the fourth-largest oil producer in the world by 2030. But much of this will depend on its economic viability, say analysts.

Brazil’s oil has another problem: its state-owned and highly indebted oil company, Petrobras. Although improving, the company remains among the most indebted oil producers in the world, with a gross debt of $87bn in 2019. Rating agencies Standard & Poor’s, Moody’s and Fitch consider Petrobras below investment grade, with a stable outlook from Standard & Poor’s and Moody’s, but a negative one from Fitch.

Much of the company’s debt reduction plan depends on divestments, while a boost in income relies on fresh production from new fields. A shaky international oil market, coupled with global economic challenges, do not bode well for Brazil.

Kazakhstan’s Covid headache

Oil is a considerable contributor to the economy in Kazakhstan, and its 172 oil fields account for 3% of the world’s total oil reserves. According to the World Bank, oil rents accounted for 10.1% of the country’s GDP in 2017.

Kazakhstan got off to a strong start in 2020. Between January and April, the government reported oil production amounting to 31.3 million tonnes, which was 102.6% of the forecast production, and 106% of the same period during 2019. Budgetary forecasts for 2020 were based on oil trading at between $50-55 a barrel. 

With China being Kazakhstan’s largest export partner after Russia, the pandemic hit trade levels from the early months of 2020. In March, PetroChina announced it would be cutting its gas imports from Kazakhstan and Kazakh energy minister Nurlan Nogayev later said gas exports to China had fallen by between 20% and 25%.

The decline in oil prices looks likely to have a significant impact on the economy during 2020, with GDP forecasted to decline between 0.9% and 1.3% during the year, according to estimates from the government and the National Bank of Kazakhstan, respectively. The central bank, which is taking a more negative outlook on the impact, moved to increase interest rates to 12% in March, but these were subsequently reduced to 9.5% during April.

In response to market challenges, the Kazakh government agreed to the terms of OPEC+ to cut oil production, pledging to reduce output by 390,000 barrels a day during May and June.

Kazakh president Kassym-Jomart Tokayev has called for the creation of a task force with focus on supporting employment, but with warnings it would lead to a cut in public spending. A support package of Tg4400bn ($10bn) has been allocated to combat Covid-19 in the country.


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