Higher oil prices to help GCC economies to maintain sound financial balance

Business Tuesday 18/October/2022 10:30 AM
By: Vinod Kumar PK
Higher oil prices to help GCC economies to maintain sound financial balance

Muscat: Higher oil prices would help Gulf Cooperation Council (GCC) economies to maintain a sound financial balance, according to an industry expert.

“The Organisation of Petroleum Exporting Countries (Opec) in general seeks to find a balance in oil markets by defending producers’ interests and safeguarding those of its clients,” said Fadi Reyad Chief Market Analyst at CAPEX.com MENA, in an exclusive interview with Times of Oman.

While the US is putting pressure to push oil prices lower to secure cheaper gas and diesel prices nationally, GCC countries are considering maintaining crude prices at comfortable levels at a time when demand is decelerating, he added.

Elaborating on the implications of Opec+ cuts in oil production by 2 million barrels a day on developing economies, he said that this move could help support oil prices at current or higher levels which could put pressure on developing economies, most of which are net oil importers.

“Developing economies have felt strong inflationary pressures during the last two years since the beginning of the pandemic and these pressures were further exacerbated by the war in Ukraine and could be supported by higher oil prices at a time when central banks struggle to rein in inflation, he added.”

The Opec+ had agreed to steep oil production cuts on October 5 to curb supply in an already tight market. The announced production cut is one of the largest that the organisation has decided since the start of the pandemic when demand nosedived. The reduction in the output shows that the organisation is ready to intervene whenever necessary to support oil markets following the evolution of the demand worldwide, Fadi Reyad said.

He further said that it is possible to see the United States take actions to push oil prices down. The US could decide to release large volumes of crude from its reserves in a bid to influence markets. Such an action could be executed in collaboration with other oil importers to achieve a greater impact.

“However, its effects could be only temporary if Opec extends its supply cuts. At the same time, weaker economic growth could weigh on prices independently,” he added.

The direction of oil markets remains uncertain as other factors continue to influence prices such as weaker economic growth, tighter monetary policies and future COVID-19 restrictions in China, which is the world’s largest oil importer.

“All these elements could impact demand and push prices lower. Opec’s latest decision and future ones could temporarily support prices, adding to the current volatility,” he said.

Speaking about fears of a global economic recession he said that a recession is a constant concern for investors at the moment and has been for a while as central banks are adamant about fighting strong inflation. Part of this inflation is fuelled by higher commodities prices in particular in Europe, which could see sharper economic woes over the longer term, he said.

When asked about the reasons Opec+ cited for raising oil prices, Fadi Reyad said, “Opec has cited current oil market conditions as a reason for reducing production, part of which was already underway as some countries were not filling their production quotas. The decreasing prices and decelerating demand were strong factors behind Opec’s decision.”

The US administration has an interest in reducing oil and oil derivatives prices as pump prices strongly influence voters. Additionally, high oil prices could further undermine central banks’ efforts in fighting inflation as well as inflate costs for businesses. As a result, the US could take steps to push prices down such as using its strategic oil reserves.

Speaking about the impact of oil output cuts on GCC stock markets, he said, “If production cuts result in sustainably higher oil prices, GCC stock markets could surge, in particular in markets like Saudi Arabia or Abu Dhabi which have a strong dependence on crude performance. At the same time, higher oil prices could negatively impact non-oil sectors which could see higher operating costs.”