Oil price slump won't hurt most Gulf states — but they're far from out of the woods 

Key Points
  • Key Gulf states are expected to maintain their balance sheets if crude prices remain low.
  • Strategists say prices even as low as $40 a barrel won't put major strains on large oil-producing economies. 
  • Goldman Sachs anticipates a rebound in Brent prices as OPEC implements supply cuts. 
An Aramco employee walks near an oil tank at Saudi Aramco's Ras Tanura oil refinery and oil terminal in Saudi Arabia.
Ahmed Jadallah | Reuters

The near-panic in oil markets last week and expectations of continued low crude prices are likely to spare key Gulf states' balance sheets, regional analysts say.

While many of the Gulf Cooperation Council (GCC) countries' currencies will avoid devaluations, however, the modest economic recovery of the last year is set to falter, with weaker growth expected in the next few quarters. The big question as to the market's direction, meanwhile, depends in large part on the decision of OPEC and non-OPEC members on production cuts in the weeks ahead.

Is an oil price rebound ahead?

As prices hover around 2018 lows and struggle to stay above $60 a barrel, market watchers are reminded of the oil price collapse in 2014 that rocked the hydrocarbon-dependent economies of Saudi Arabia, Kuwait, Bahrain, Qatar, Oman, and the United Arab Emirates. Both global benchmark Brent crude and U.S. West Texas Intermediate (WTI) are down more than 20 percent this month, and if monthly losses continue at the current pace, could see their biggest fall in more than ten years.

But according to Capital Economics, prices as low as $40 to $50 a barrel shouldn't put major strains on the larger economies' balance sheets as long as tight fiscal policy is maintained. The fiscal policy reforms of the last few years — subsidy and spending cuts and the introduction of new taxes — will continue but at a more subdued rate than when first implemented, preventing potential currency devaluations and protecting dollar pegs, the consultancy said in a research note published Monday. This means that current accounts in the major Gulf economies — the balance of imports and exports — are likely to stay in surplus.

Global bank MUFG, meanwhile, is convinced that both Brent crude and WTI are "oversold" and "will rebound from their current bearish market mode," it said it a weekly report Monday. Goldman Sachs, similarly, anticipates a rebound for Brent as OPEC members implement production cuts.

Lower-than-expected growth

But these economies are by no means in the clear, as many analysts point out. Dramatic moves in capital flows risk hurting dollar pegs, and these tend to happen in conjunction with political shocks, like the Saudi-led blockade of Qatar in 2017 or the fallout over the murder of Saudi journalist Jamal Khashoggi in October. By the end of that month, $650 million in foreign funds were withdrawn from the Saudi stock market.

Meanwhile, economic growth is set to weaken as oil production increases remain off the table and local labor and property markets — for example in Saudi Arabia and the UAE, respectively — see continued slides. And Capital Economics predicts gross domestic product growth to hover around 2 percent in the coming years, lower than most analysts' expectations.

In the long run, the report said, prices below $50 a barrel will only stay sustainable "if policy is kept tight and domestic demand stays subdued," meaning that demand for imports has to remain low to keep the trade balance under control. But in the current picture, "a return to the aggressive fiscal austerity imposed in 2015-16 seems highly unlikely."

Oman and Bahrain in trouble

The four largest Gulf economies — Saudi Arabia, the UAE, Kuwait and Qatar — are in fact well-positioned to withstand low oil prices. Capital Economics' calculations found that even if prices dropped to $30 a barrel, "all else equal the Gulf countries could finance large current account deficits from their FX savings for at least a decade — the UAE could do so indefinitely."

But that leaves out Bahrain and Oman, who are in a less enviable position. The economically smaller Gulf states face greater risk of currency devaluation and run substantial current account deficits — Oman's equates to more than 15 percent of its GDP. Economist calculations reveal that both countries would need oil at $80 a barrel to pull their current accounts back into surplus.

Still, support from the larger Gulf neighbors, like the recently agreed $10 billion bailout package for Bahrain and a similar arrangement expected for Oman, suggest that these countries will manage to stay afloat.

A 'Saudi First' policy

A number of economists foresee oil remaining between $55-60 a barrel for the next few years. But the market remains vulnerable to abrupt shocks, like the reaction to U.S. waivers for countries importing Iranian oil amid sanctions, or the geopolitical dynamics surrounding Khashoggi's murder.

Meanwhile, it's anyone's guess whether Saudi Arabia will go through with previously proposed production cuts to offset global oversupply, given the kingdom's reluctance to displease President Donald Trump, who is adamant to keep a lid on oil prices.

Ehsan Khoman, head of MENA research at MUFG, sees Saudi going ahead with their own interests, despite Trump's demands and his support for the monarchy over the Khashoggi scandal.

"The kingdom remains cognizant that the U.S. may have geopolitical leverage over the country, but we view that the Saudi authorities will see through U.S. pressure to concentrate efforts on their 'Saudi First' policy" — prioritizing its needs for oil prices to get to its fiscal breakeven price of $72 a barrel in 2019, he said in this week's economic report.

The longs are all gone for oil, says IHS Markit's Yergin
The longs are all gone for oil, says IHS Markit's Yergin