OPEC+ Production Compounds Economic Impact Of COVID-19 Pandemic

The close-to 10 million barrels per day cut in oil production agreed to by major oil-producing nations will likely not be enough to counter the body blow to demand dealt by the coronavirus pandemic, and in fact, may exacerbate the problems facing some governments by shrinking revenue they will rely on to combat the crisis in the coming months.

“Following the dramatic decline in oil prices since the beginning of the year, near-term prospects for oil-exporting countries have deteriorated significantly: the growth rate for the group is projected to drop to -4.4 percent in 2020,” the International Monetary Fund said in its April World Economic Outlook.

The IMF noted oil prices will likely remain below $45 a barrel through 2023, 25 percent lower than the 2019 average price, “reflecting persistently weak demand.” In the short term, the IMF is assuming average annual prices of $34.80 a barrel in 2020 – 43.3 percent decline from the 2019 average – and $36.40 a barrel in 2020.

At the time of writing, OPEC’s daily basket price stood at $17.51 a barrel on April 15, compared with $19.70 the previous day.

“Uncertainty is very elevated, given the unpredictable course of the pandemic,” the IMF report warned, with risks tilted to the downside in the very near term, “as storage may fill up locally.”

“The biggest downside risk is a sharper slowdown in global economic activity from the pandemic. Other downside risks include a collapse of the OPEC+ coalition and a stronger-than-expected resilience of US shale oil production to the lower price environment, the report added.

The IMF warned that these developments will weigh heavily on oil exporters over-reliant on revenue from crude oil – particularly high-cost producers – “and compound the shock from domestic infections, tighter global financial conditions, and weaker external demand.”

The International Energy Agency on Wednesday said it expects the coronavirus pandemic will cause global oil demand to plunge by 9.3 million barrels per day this year, due in large part to the confinement measures implemented in 187 countries and territories.

For oil-producing countries in Sub-Saharan Africa, the IMF expects economic activity to collectively decline by almost 3 percent this year, rebounding by 2.5 percent in 2021

Earlier this week, the OPEC-plus group of nations – led by Russia and Saudi Arabia – reached an agreement to reduce their overall crude oil production by 9.7 million barrels per day, beginning May 1 until June 30. For the next six months after that, July 1 to December 31st, the total adjustment eased to 7.7 million bpd. This will be followed by a 5.8 million bpd reduction from January 1, 2021, to April 30, 2022. The agreement is valid until April 30, 2022, although a possible extension will be discussed in December 2021.

For oil-producing countries in Sub-Saharan Africa, the IMF expects economic activity to collectively decline by almost 3 percent this year, rebounding by 2.5 percent in 2021. Nigeria, the largest oil producer in the region, is forecast to contract by 3.4 percent and then grow by 2.4 percent next year. Angola’s GDP is expected to shrink by 1.4 percent in 2020 and then grow by 2.6 percent in 2021.

As for the Middle East, analysts at Dubai-based banking group Emirates NBD warned in a research note that “for producers in the MENA region, the impact of the cuts will be severe if they are adhered to strictly.”

For the oil-exporting countries that make up the Gulf Cooperation Council – Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates – they warn that there is “an even bigger double-blow,” as the impact of lower oil prices on government revenues will be compounded by lower production volumes.

The IMF expects real GDP for oil exporters in the Middle East and Central Asia to decline collectively by 3.9 percent this year.

“Lower GDP estimates for this year will also result in bigger budget deficit metrics across the GCC, where these have already widened in absolute terms on the back of lower oil revenues,” the Emirates NBD research note said.

In Saudi Arabia, where the oil sector makes up 38 percent of the economy, Emirates NBD is projecting a 3.3 percent drop in oil and gas production. No surprise then that the IMF’s WEO forecasts a 2.3 percent decline in GDP this year before it bounces back by 2.9 percent in 2021.

In the UAE, Emirates NBD said the OPEC-plus agreement implies a 9 percent year-over-year drop in crude oil output, meaning a 7.5 percent contraction in its hydrocarbons sector (30 percent of the economy). The IMF projects economic activity in the UAE will shrink by 3.5 percent in 2020, and then rebound by 3.3 percent in 2021.

Kuwait’s economy is considered much less diversified, with the oil production responsible for 54 percent of its real GDP growth, and Emirates NBD is predicting a 10 percent contraction in this vital sector of its economy. The IMF predicts a 1.1 percent decline in economic activity this year, followed by a 3.4 percent increase in 2021.

The WEO forecast real GDP for Iran, Iraq, and Qatar to contract by -6.0 percent, -4.7 percent, and -4.3 percent, respectively, in 2020 before growing by 3.1 percent, 7.2 percent, and 5 percent in 2021.