High oil prices to act as buffer for GCC economies

Muscat: High oil prices recorded this year have added an extra cushion to the finances of Oman and other GCC countries as they rely heavily on energy export revenues, according to an industry expert.

The upward trajectory in crude prices could also act as a buffer for these economies in the coming months. “The region would also continue seeing strong growth, thanks to improvement in non-oil sectors and various diversification initiatives of GCC economies,” Osama Hamdan, Sales Director at XTB, said in an exclusive interview with the Times of Oman.

Elaborating on the expectations of world oil prices next year, Hamdan said, “Oil prices could remain under pressure next year as the global economy could continue slowing down. There are concerns that a recession could take place which could strongly affect demand for crude, pulling prices down in the process.”

“The decrease in demand could be less severe if Chinese economic activity improves with the gradual lifting of sanitary restrictions. At the same time, we could see supply limitations in particular if geopolitical tensions in Europe grow and new sanctions further impact production. Opec’s decision could also have an impact if the organisation adopts output cuts,” he further added.

Sounding a word of caution, Hamdan said that geopolitical tensions and economic growth prospects could heavily affect oil prices’ direction with traders closely observing both factors. “Monetary policies are having a strong impact on the global economy and are expected to continue changing during the coming months as the Federal Reserve could be reviewing the pace of interest rate increases and policy tightening,” he said.

Speaking about the Brent crude price, the analyst said it could hover around the current levels if the expected economic slowdown is not too severe. Otherwise, prices could be seen lower in the case of a severe recession. However, the Organisation of Petroleum Exporting Countries (Opec) could move to provide a floor for the market by cutting production levels.

“Global oil inventories could rise to a certain extent if supply outpaces demand, particularly if the global economic slowdown is sharper than expected and prices remain relatively low,” Hamdan said. “However, Opec could take steps to stabilise the market by reducing output, thereby helping keep inventories relatively stable throughout the year,” he further added.

Regarding Opec's stand relating to oil production and price, Hamdan said the oil exporting members group could move to secure prices above a certain threshold to maintain healthy revenue levels for its member-countries. As a result, it could announce new cuts in production levels at its future meetings if crude prices retreat too much. “Opec has previously decided to limit output when it deemed that available volumes were enough to cover global demand,” he added.

Elaborating on who is buying Russian oil and gas since the Ukraine crisis, Hamdan said since the start of the Ukrainian conflict and the adoption of sanctions against Russia, Russian oil has found its way towards countries like China and India. “Both countries are large oil importers due to the respective size of their economies and due to the European sanctions, China and India were able to secure oil prices at significant discounts compared to market prices.”

The recent price caps on Russian oil announced by the European Union near current selling prices could further pressure Russia to lower its prices for Asian buyers which are becoming the main trading partners. However, the measure could add a new layer of complexity to the oil supply chain as shipping companies have to contend with insurance issues. In the meantime, the price cap could have a limited impact on the market as a whole.

Regarding the impact of oil prices on developing countries, Hamdan said the emerging economies lacking hydrocarbon resources could greatly benefit from lower energy prices and softer inflation in general despite a global economic slowdown. “Most saw their economies being affected by higher input costs as imports, like grain and energy became dearer as well as other items whose prices were influenced by supply chain issues,” he added.