“Crude Oil Prices Hit Oil-Producing Countries”

The international benchmark North Sea Brent futures is currently around $ 25 a barrel. Below half the January peak, well below the break-even point needed to balance countries. The International Monetary Fund (IMF) estimates that the break-even price in 2020 will be $ 83.6 for Saudi Arabia, $ 70 for UAE and $ 87.6 for Oman.

Saudi Arabia itself, which triggered the collapse of the coordinated cut in production, will also be hit by a fall in income. The state oil company Saudi Aramco has loosened the supply faucet to its fullest extent, but the impact of a price drop of more than 40% is still greater than an increase in production (27%). Debt at around 10% of gross domestic product (GDP) is expected to be even larger.

In the currency futures market, selling pressure is increasing on oil-producing currencies that peg to the US dollar. Countries where fiscal consolidation has not progressed do not have enough foreign currency reserves to support the peg system. Currency devaluation can cause economic turmoil through price hikes.

“Oman and Bahrain’s currencies are at the greatest risk on the Gulf,” said Mohamed Abbasha, economist at EFG Hermes, a leading investment bank in the Middle East. One year ahead of the Oman currency, foreign exchange contracts against the dollar have temporarily set new lows.

Nigeria, which has experienced multiple currency devaluations in the past, relies on oil for 90% of its exports. The real rate of the currency Naira is currently $ 370 per dollar, but one year later, the futures market price is around $ 450 per dollar.

Concerns over the peg system will increase the cost of borrowing funds from issuing government bonds. Oman’s 10-year government bond yields have risen by more than five points to over 10%, following a downgrade by Western rating agencies. It is uncertain how far the new coronavirus will affect the global economy, and investors are drawing money from high-risk assets.

Oil-producing nations, such as Saudi Arabia, will promote reforms in nation-building that do not rely on oil. This is because the population has grown, the former state-owned structure has reached its limits, and consuming countries are moving away from fossil fuels. In order to diversify the industry, large amounts of money are needed for investing in training and education of workers and for infrastructure development. Unpopular austerity measures, such as tax increases and subsidy cuts, could lose public support for reform.

Aramco’s initial public offering (IPO) in overseas markets has been even more challenging for Saudi Crown Prince Mohammed. The Crown Prince has claimed that Aramco’s corporate value is $ 2 trillion, but crude oil prices have weakened stock prices and the market capitalization is currently around $ 1.6 trillion. Potential investors may have become more worried about minority shareholders’ voices as a result of Aramco’s aggressive production policy changes as if they ignored the market environment.

On the other hand, the depreciation of the Russian currency ruble, which has entered the fight for share with Saudi Arabia, has the effect of reducing Russia’s oil production costs. There are no signs of a dialogue between Saudi and Russia to return to coordinated production cuts.

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Crude Oil Prices Hit Oil-Producing Countries - /10

Summary

The international benchmark North Sea Brent futures is currently around $ 25 a barrel. Below half the January peak, well below the break-even point needed to balance countries.

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