GCC budget breakeven oil price creeps up

16 April 2014
Budget breakeven oil prices in most Gulf Arab producers are creeping upwards, as governments continue to push through investment stimulus programs despite flatter production.

The budget breakeven price is a useful tool to understand what price of oil is needed to ensure that a budget is in balance for a given level of government spending.

Breakeven prices for Gulf states shot up from an average of USD 43.2 per barrel in 2007 to USD 78.8 by 2011 in the wake of the Arab Spring, as governments unleashed billions of dollars of investment to appease their populations.

Breakeven oil prices fell in 2012 but the dip proved to be temporary and breakeven prices have again begun to edge up, notes Deutsch Bank.

"For the region as a whole, we estimate that the breakeven price increased by about USD 6 per barrel to USD 79 per barrel in 2013 as oil production stabilized but public spending continued to grow.

"We think that the breakeven price for the region will increase a little further this year to USD 81 barrel with a moderate increase in oil production helping to offset the impact of further growth in government spending," wrote Richard Burgess, analyst at Deutsche Bank in a note to clients.


OPEC crude oil supplies dropped by 890,000 barrels per day in March, as Iraqi, Saudi and Libyan exports fell, according to the International Energy Agency.

OPEC heavyweight Saudi Arabia's output fell to the lowest level in almost a year in March, down by 285,000 bpd to 9.57 million bpd from February levels.

"Saudi supplies to the market, which include sales from storage, were reported at 9.53 million bpd in March, around 370,000 bpd below the previous month," the IEA said in its April report.

Deutsche Bank expects Saudi output to average around 9.8 million bpd this year, similar to its production level of 2012 -- but breakeven prices are expected to much higher than the USD 81 in that year.

"The increase stems from: the small drop in oil production last year; moderate growth in real public spending of about 2%; and a drop in non-oil revenues. Even if oil average for last year, we think the budget breakeven price (for Saudi Arabia) will edge up a little further to USD 93 per barrel this year.

"This would allow for further positive real growth in public spending of about 1%. The breakeven price could be lower than this, however, if nonoil revenues rebound more strongly than we have assumed."


Oil production from the UAE, Kuwait, Oman and Qatar has been steady over the past few years and is likely to remain at similar levels. But what's changed is public spending patterns, which are moving the needle on breakeven prices.

In Qatar, gas production has reached a near-term plateau while oil production from mature fields has fallen (Deutsche Bank includes gas prices in its breakeven oil price figure).

"The government is proceeding with efforts to diversify the economy, with a number of large capital projects, and this will push the breakeven price up to USD 68 barrel this year," Deutsche noted.

Fiscal expansion is also continuing in Kuwait, which will see breakeven prices increase.

"Having been the lowest in the region for many years, the breakeven price in Kuwait will probably exceed USD 70 per barrel this year."

But that's not the case in other Gulf states.

In the UAE, budget breakeven oil price has eased back from USD 95 per barrel in 2011 -- at the height of the government's fiscal stimulus -- to around USD 72.2 per barrel last year. The breakeven price is expected to slide back to USD 71 per barrel in 2014 - the lowest in six years.

Fiscal consolidation is also bringing down the breakeven price in Oman following a spike in government spending in 2012.

Compared to other countries that rely heavily on hydrocarbon exports, Gulf states seem to be in a much better fiscal position to sustain themselves in the event of a decline in oil prices. Gulf states generated a little over USD 500 billion in oil revenues in each of the past few years, and they remain well cushioned from a sudden crude price crash.


Within the region, of course, there are huge discrepancies. Bahrain, a small oil producer, has the highest breakeven oil price of USD 134 per barrel for 2014, given its weak fiscal position.

Indeed, Bahrain's breakeven is higher than all the other oil-producing countries surveyed by the German bank, including Venezuela (USD 121 per barrel), Nigeria (USD 118.8) and Russia (USD 101.7).

"The political unrest of the past three years has already been a drag on economic growth and has raised fiscal vulnerabilities as the government has responded with additional expenditure," said Citibank in a report.

The Wall Street bank expects non-oil growth to slow down, but oil production to stabilize, resulting in medium-term growth in the 3.5% to 4.5% range.

Upside risks to this outlook include a resolution of the country's ongoing political turmoil (still unlikely in the near term, in our view, despite latest initiative) and greater-than-expected assistance from Gulf neighbors, including Saudi Arabia. This may include, for example, an increase in the allocated share of output from the shared Abu Safa oil field, which would dramatically boost Bahrain's domestic production."

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