Oil Below $20 Will Wipe Over 10% Off Many Exporting Countries’ GDP

The oil market has taken a hammering in recent months following a slump in crude demand caused by the global coronavirus or CoVid-19 pandemic and the collapse, on March 6, of market co-operation between Saudi and Russian-led group of OPEC and non-OPEC exporters dubbed OPEC+ by the wider market.  

At one point intraday on March 18, the West Texas Intermediate (WTI) front-month contract traded at a 17-year low of $20 per barrel before a mounting a slow recovery in response to U.S. and global stimulus measures. Over the current trading week, both the WTI as well as global proxy benchmark Brent appear to be settling above $20 per barrel levels.

However, an absolute collapse in confidence with a slump in prices down to the $10-to-‘teens’ range remains a strong likelihood. That’s because the reality of the physical market glut for the second quarter of 2020 will begin to bite and will reflect in futures prices.

Whole economies, including heavyweight importers such as India, are currently in the grip of coronavirus lockdowns. By some estimates, as much as 10 million barrels per day (bpd) of global crude production would be surplus to requirements.

Were such a slump to happen, a $10-20 per barrel price range would wipe off some exporting nations’ revenue by over 10% of their gross domestic product (GDP). Of course, the severity of the impact of historically low prices on oil and gas producers will vary from nation to nation depending on the diversification of their economies.

At the lowest end of the pain scale would be Norway. The country’s economy is indeed suffering from the recent, sharp drop in crude prices since mineral fuels accounted for 55.6% of its total exports in 2019. Based on Reuters data, crude oil sales alone raked Oslo $33.3 billion last year. That equates to crude exports accounting for around 7% of GDP.

The Norwegian government expects GDP to contract by 1% in 2020 revised lower from previous growth forecasts of 2.5%. While Norway can protect itself via various measures, including its currency and interest rates cuts, recently lowered by 125 basis points to 0.25%, many Gulf economies lacking diversity with their currencies pegged to the U.S. dollar are in a whole world of trouble, according to Moody’s, even if fiscal Armageddon of 10% revenue declines won’t hit all.

“The sovereigns most vulnerable to lower oil prices in 2020-21 are those with the highest reliance on hydrocarbons as a source of fiscal revenue and exports, and limited capacity to adjust,” says Alexander Perjessy, Senior Analyst at Moody’s.

The rating agency estimates that fiscal revenue and exports would decline by more than 10% of 2019 GDP in 2020 in Iraq and Kuwait, compared with its previous projections, in the absence of any upward adjustment to prices, or takers for an increase in oil output.

Moody’s also highlights some who’d feel the pain just shy of a 10% revenue loss. These include Oman, Qatar, Azerbaijan, Congo, Bahrain and Saudi Arabia, which has declared its intention to pump aggressively in a bid to capture market share.

“In these cases, we anticipate a fall of 4% to 8% of GDP. The decline would be smaller, at less than 3% of GDP, in Russia, Kazakhstan, Trinidad and Tobago, Nigeria and Gabon,” Perjessy adds.

Overall, Moody’s says the most vulnerable nations are Oman, Bahrain, Iraq and Angola, where external vulnerability is high and capacity to “adjust to the shock is limited.”

By contrast, stronger fiscal positions ahead of the shock buffer the credit implications for Qatar, Russia, Azerbaijan, Kazakhstan and Saudi Arabia. And robust sovereign balance sheets will support Qatar and the United Arab Emirates, and, to a lesser extent, Kuwait, Azerbaijan, Kazakhstan and Saudi Arabia.

Much has also been said in recent weeks about Russia’s capacity to weather the low price storm via its intention to call upon the nation’s $150 billion sovereign wealth fund, and a favorable taxation regime that sees Moscow impose levies in rubles on its producers who book revenue in dollars.

Yet, Moscow will be hurting too. Fitch Ratings has cut the country’s GDP growth forecast to 1% in 2020 from its earlier forecast of 2% published in December. The rating agency says that even in 2019, Russia’s overt reliance on revenues from hydrocarbons saw it post an underwhelming GDP growth rate of 1.3%, shy of Fitch’s projection of 1.4%.

It expects growth to slow in the first two quarters of 2020 at the very least as lower oil prices, a weaker currency and “subdued external demand for Russian exports” reduce investment.

The coronavirus outbreak’s squeeze on global oil demand and the breakdown of the OPEC+ agreement have created a deep, albeit temporary, shock to oil prices. Should there be a shock price plunge below $20, few will be sitting pretty, including Saudi Arabia and Russia, despite their public bravado.