In a possible optimistic scenario, the oil prices are expected to recover averaging $40 in 2020-21 and the production will remain in line with the Opec+ quotas, according to research firm Mena ADVISORS.
The Mena ADVISORS, in its latest report on the region, has established 3 possible scenarios to estimate a range of different outcomes from the COVID-19 shock on the GCCthe Baseline, Pessimistic and Optimistic. The Baseline Scenario does not expect the Opec+ deal to hold out to the end of 2021.
It is unlikely to succeed in raising the oil price significantly as this is a demand shock rather than a supply shock.
Based on this assumption the oil price is expected to average $30 in 2020-21 and for production to remain around 10 percent below full capacity.
Full capacity for most of the GCC is not likely to be a sustainable level of production. Q a t a r i s a s s u m e d to have constant hydrocarbon production in all scenarios as it is no longer an Opec member and is largely a gas rather than crude oil producer.
In the Baseline Scenario, the Mena ADVISORS assumes the shock lasts around 6 months with some form of restrictions on the movement of people and business activity in place. Based on available data a shock to the non-oil sector of 23 percent-29 percent reduction in output looks reasonable., said Rory Fyfe, Managing Director, Mena ADVISORS said.
In this scenario Mena ADVISOR’s model suggests that the GCC will run annual fiscal deficits of around $250bn or 20 percent to 21 percent of GDP in 2020 and 2021 based on announced fiscal policy with non-oil output contracting 16 percent in 2020 and 4 percent in 2021.
Assuming a Pessimistic Scenario, the Mena ADVISORS assumes that the Opec+ deal breaks down but it also assumes a lower average oil price of $20 and lower production of 15 percent below capacity.
It envisages a longer and deeper shock of 9 months and a reduction in output that is 10 percent worse than in the baseline (33percent-39 percent) as well as a longer recovery period of 18 months. For the Optimistic Scenario, Mena ADVISORS assumes that the Opec+ deal holds and that oil prices recover, averaging $40 in 2020-21.
“We assume production remains in line with the OPEC+ quotas. The shock is assumed to be shorter and less severe at 3 months and with 15% lower reduction in non-oil output than in the baseline (13 percent-19 percent) with a quicker recovery period of 6 months”, said Rory Fyfe, Managing Director, Mena ADVISORS.
