Eurasia Press & News
A new COVID-19 strain and the possible return of Iranian crude to global markets could inflict “short-term pains” to Gulf oil producers whose local populations hold on to the oil era.
Gulf oil producers are hopeful for a turnaround in 2021, especially that the COVID-19 vaccine will mean increased demand for energy from consumers as economies get back to normal. But a return to normalcy may take until mid-2021, as time is needed for populations to be vaccinated and a new, even more contagious strain of the coronavirus may signal that things may get worse before they get better. And then there’s the possible return of Iranian oil to market, if the Iran nuclear deal is back in force, which could depress prices.
The “big unknown” for oil markets that could cause “short-term pains” for Arab Gulf producers in 2021 is a new coronavirus strain first detected in the United Kingdom, said Colby Connelly, an analyst at Energy Intelligence, a leading provider of energy news and analysis.
Global oil demand could remain depressed longer than initially anticipated as the world cuts air ties with the United Kingdom and several countries brace for renewed lockdowns. “Most of the good news will probably come in the second half of 2021,” Connelly told Al-Monitor.
Brent prices will average $49 per barrel in 2021, the US Energy Information Administration estimated. It is still well below the $68 a barrel that Saudi Arabia needs to balance its budget, which forecasts a drop in public spendings by about 7% next year.
The borrowing spree of Gulf governments and companies to pay for the cost of COVID-19 hit is set to keep up the pace of 2020. About $120 billion of dollar debt and Islamic securities will be issued in 2021, asset management firm Franklin Templeton estimated.
“Who is going to be able to buy it”
The possible return of Iranian crude to global markets — US President-elect Joe Biden pledged to reenter the 2015 Iran nuclear deal — could also add further pressure on Gulf oil exports as Tehran announced it projects to roughly double its oil production next year.
“There is not much of a doubt about Iran’s ability to increase their output quickly, the area where the doubts come in of course is who is going to be able to buy it,” Connelly said. The analyst is “skeptical” whether US sanctions on nearly all Iran’s petroleum sector could be lifted in no time since it might “not win Joe Biden a lot of fans in his early days.”
Moreover, the risks of a hard-liner shift during Iran’s presidential elections in June 2021 could derail the president-elect’s foreign policy efforts to resuscitate the nuclear deal.
Iran, like Saudi Arabia, the United Arab Emirates (UAE) and Kuwait, is a member state of OPEC, an intergovernmental organization that coordinates petroleum policies to influence crude oil prices.
Members of the cartel and 10 allied nations signed a production cut agreement back in April that first withdrew almost 10% of global supplies from the market to offset a slump in demand caused by the coronavirus pandemic. The group agreed Dec. 3 to return 0.5 million barrels per day to the market in January, though it is four times less than the initial target.
The UAE said it will struggle to continue with the same reductions going into 2021 as Abu Dhabi is already cutting around a third of its output potential. The move signals Abu Dhabi’s more assertive policy to protect its national goal of boosting production by 2030.
The Abu Dhabi National Oil Company, which has one of the world’s lowest production costs, wants to ensure it monetizes its reserves “as much as it possibly can before the world transitions towards lower-carbon energy sources,” industry sources told Reuters.
Intra-OPEC tensions might increase in 2021 over the return of Iranian oil to global markets and the lack of output compliance with quotas from some members of the cartel.
East Asian economies’ rapid recovery could give Gulf Cooperation Council states a glimmer of hope on the demand side. Gulf fossil fuel exports mainly head east, and China took 88% of Oman’s oil exports in September. Yet Connelly said Asian markets are not the “guarantor of continued demand” as high exposure to the region could turn out to be a double-edged sword.
China formalized its zero-carbon agenda for 2060, and S&P Global reported such a decision from the largest energy consumer could be “the turning point for fossil fuel markets.” Japan and South Korea have committed to achieving net-zero carbon emissions by 2050.
“Refusals to deal with a new reality”
The coronavirus pandemic has acted as a catalyst for accelerating clean energy transitions as global public opinion calls for “rebuilding better,” incarnated by Biden’s pledge to rejoin the 2015 Paris climate agreement and accelerate the energy transition. Gulf countries, however, face the challenge to reinvent the core of their fossil fuel-based economies.
“There is this hope or kind of simplistic belief among the citizens that oil revenues will rise and this is just a downturn. … I don’t think that the public has really absorbed this idea that oil revenues are not gonna last,” said Amnah Ibraheem, an energy policy researcher who examines public perceptions of energy diversification policies in the Arab states.
Kuwait’s opposition figures took nearly half of parliament’s seats in a vote earlier this month, signaling a rally behind tribal and Islamist candidates to block economic reforms. “There is a lot of pushback and refusals to deal with a new reality,” Ibraheem told Al-Monitor.
Yet state-led pushes to develop new sources of revenues are gaining momentum.
In the UAE, liberalization reforms and a move to allow 100% foreign ownership of companies aim at attracting foreign investors and strengthen the Emirati non-oil economy, which already accounts for about 70% of the federation’s gross domestic product.
Saudi Arabia views green hydrogen produced from renewables as a potential new cash cow and plans to build the world’s largest green hydrogen plant in NEOM, the kingdom’s futuristic city. Globally, green hydrogen production could become a $300 billion export market, displacing around 37% of pre-pandemic global oil production by 2050.
But notwithstanding the unprecedented changes brought about by the pandemic, Gulf states cannot fathom to decouple their future from the oil rent. They instead bet on being the oil market’s last man standing during the era of decarbonization.
Saudi Arabia is “going to produce the last drop of oil,” the Aramco former chairman said in 2019.
Ibraheem concluded, “When oil prices are low, the idea of sustainability is very important domestically speaking; when oil prices are high, there is the idea of oil sustainability.”
