Middle East Oil Outlook
It is estimated that approx. 81.5% of the globe’s known crude oil reserves are located in OPEC Member Countries, with the Middle East accounting for approx. 65.5% of OPEC oil reserves. In May 2017, OPEC agreed to extend production cuts into 2018 in order to offset the three year glut in oil supply.
Saudi Arabia: ‘Vision 2030’
Graph 1: OPEC crude oil production has hovered around 10000 barrels per day for the past 4 years
OPEC daily oil production
Source: Bloomberg
Saudi Arabia is OPEC’s largest supplier of oil, producing 10.46 million barrels per day in 2016. Last year Saudi Arabia launched a revolutionary economic programme titled: ‘Vision 2030’. The report outlined plans to diversify the economy through the expansion of non-oil industries, as currently around 80% of government revenues are generated from the oil sector. Low oil prices in the past 3-4 years have increased pressures on Saudi Arabia to reduce their reliance upon oil in order to alleviate their vulnerability to fluctuations in oil prices, as for instance in the last two quarters of 2015, Crude oil was consistently priced below $50 per barrel. This led to Saudi Arabia incurring a budget deficit of $98 billion which is equivalent to approx. 16% of its GDP in the same year which, in turn, has only served to increase the country’s debt levels. This drove the Saudi government to issue bonds internationally last year, for the first time in its history, in order to finance its deficit.
The Saudi government hope to raise at least $100 billion worth of funds through the partial privatisation of Saudi Aramco, the world’s largest oil firm commanding around 12% of global oil production. By selling 5% of the company’s shares, the Saudis hope to increase investment in non-oil sectors including: technology, tourism, mining, health and car manufacturing. However, in November 2017, the world’s largest sovereign wealth fund worth $1 trillion in Norway has proposed to sell all of their oil and gas stocks, valued around $35 billion, in order to, according to the Ministry of Finance, reduce the fund’s exposure to the risks associated with a ‘permanent drop in oil prices’. Since the prospects of the biggest potential buyer acquiring Aramco’s shares have been wiped out, this has raised questions over who will be willing to buy what could potentially be the globe’s biggest IPO given its high value nature. With Saudi Arabia endeavouring to restructure their economy away from oil, concerns have been raised over the feasibility of their plans. Especially during times of high oil prices when there is an increased danger of complacency manifesting, the sense of urgency that has currently been occupying the Saudis may evaporate away.
Iran: Geopolitical Risks
Producing 4.068 million barrels per day in 2016, Iran is OPEC’s third largest supplier of oil. Escalating tensions between Iran and Saudi Arabia have led commentators to speculate of an all out war breaking out. Although, historically frictions have existed between the two nations, hostilities have increased as Saudi Arabia have accused Iran of being responsible for arming Yemini rebels with rockets and also interfering in Yemeni politics amongst other things. Iran, in turn, has blamed Saudi Arabia for idly stirring up trouble. With Crude oil currently trading above $60 per barrel, some analysts have predicted that Crude could reach double digits if war does materialise which may be further exacerbated if sanctions are reinstated by the US on Iranian oil exports in January in response to Iran’s nuclear programme. When sanctions were previously imposed, approx. 1 billion barrels per day of oil supplies were cut off from global markets. Though it is generally not expected that any prospective sanctions will have a similarly large effect, there is a consensus amongst experts that the sanctions will nevertheless prove to be quite disruptive. Overall, Iran’s foreign policies will have a continuing impact on global oil supplies in the mid to long term.
Investment Recommendations
OPEC raised its forecasts on long term global crude oil demand by 1.7 million barrels per day in its annual World Oil Outlook report (published in November 2017), highlighting the main drivers of oil demand to be derived from the sector growth of road transportation, aviation and petrochemicals resulting from the expansion of the middle class and increase in population. Although, despite this, long term investors should be aware that OPEC does expect long term demand growth to go into steady decline as a result of tighter energy efficiency policies, advancements in alternative energy sources, increased usage of electric cars and the orientation of developing economies away from capital intensive to service based industries.
With regards to the short term, given that in the November 2017 issue of OPEC’S monthly market report, it is anticipated that world oil demand will increase by 1.3 million barrels per day in 2018 alongside the fact that OPEC plan to continue cutting production of oil going into next year, it is recommended that investors should long crude oil futures. The combination of both supply side and demand side factors should culminate in a bullish market, especially given the precarious situation between Saudi Arabia and Iran.