Page 6 - MEOG Week 26 2022

MEOG PRICES & PERFORMANCE MEOG

Gulf region set to boom on high prices

GULF WHILE the rest of the world is suffering from increase production due to a lack of spare capac-
the after-effects of the coronavirus (COVID-19) ity, says Capital Economics.
pandemic and now a war-fuelled food crisis, the “Even so, we anticipate an increase in produc-
Gulf region is going to be a global bright spot tion from their current levels over the coming
with growth well above consensus levels, Capital years. All told, we estimate oil sectors will con-
Economics said in a note on June 28. tribute 2.5-4% pp, on average, to GDP growth
“We think that rising oil production and high this year and next,” says Swanston.
global energy prices will result in rapid GDP Qatar is more reliant on gas production and
growth this year and next across the Gulf econo- its LNG is in high demand at the moment, due to
mies. Growth is likely to be well above consensus the tensions in Europe, but the scope for gains in
expectations,” said James Swanston, the Middle GDP is limited. The country’s output is already
East and North Africa economist for Capital at capacity as demand for LNG has been running
Economics. white hot since the gas crisis started last year.
The high price of oil will drive the growth Europe has been importing record amounts of
through two channels, according to Swanston. LNG in a race to fill its storage tanks to 80% of
capacity before the start of the heating season on
First channel October 1 leaving little slack in the system.
The first is real value added in the hydrocarbon Qatar is not planning any new facilities and
sector, which accounts for an average of 35% cannot expand production until 2025 at the ear-
of real GDP across the six Gulf economies. In liest, when the North Field expansion is due to
Kuwait more than half of the economy is made start operations. Once online, however, this will
up by the oil sector and has already contributed raise the country’s LNG output by 63% and boost
7.4% pp to GDP growth of 9.9% year on year in GDP by around 25%.
the Kingdom of Saudi Arabia (KSA) this year.
Adding to the impetus is rising oil production Second channel
amongst the OPEC+ members, which has been The second channel through which hydrocar-
given a boost by the energy embargo on Russia bon sectors affect GDP growth is indirectly via
that is expected to reduce its production by up to incomes, Capital Economics argues.
3mbpd this year. “High prices mean that hydrocarbon exports
“We have long argued that OPEC+ would will be, on average, 7% of GDP higher this year
raise its output more quickly than expected. The compared to 2021. This results in higher income
group responded last month by boosting the and allows for stronger domestic demand,” says
monthly increase in its oil production quota by Swanston.
50% – from 432,000 bpd to 648,000 bpd – for Governments have so far seemed reluctant
July and August,” says Swanston. to loosen fiscal policy because of soaring global
OPEC+ is set to fully unwind its pandem- inflation, but Capital Economics believes that
ic-related output cuts by September and ana- governments will start to loosen the purse string
lysts say that the increases may go beyond the over the rest of the year, boosting non-oil sectors.
rises already announced. KSA in particular is While the world is facing a growing risk of
under pressure from the US to raise production, stagflation due to the polycrisis-induced fac-
as Russia’s war has been pushing up prices to an tors, the price pressure has been noticeably less
uncomfortable level and US President Joe Biden in the Gulf Cooperation Council (GCC) coun-
is keen to bring the price at the pump in the US tries thanks to modest government stimulus
down ahead of the midterm elections due later measures post-pandemic and price caps on
this year. key sectors like food and fuel. The lower rates
“For our part, we think OPEC+ will even- of inflation – Oxford Economics is predicting
tually remove the shackles on its members and inflation to run at 3.2% this year, up from early
allow those with spare capacity to produce forecasts of 2.8% and a global rate of 7.8% – are
more,” Swanston said. driving faster growth across the region, pulling
Capital Economics says that KSA and par- back expatriate workers that left during the pan-
ticularly the United Arab Emirates (UAE) will demic. Governments are anticipated to keep a lid
make the most of the chance to expand produc- on inflation with more of the same while they
tion to all-time highs by the end of 2024. Despite replenish their coffers. The scope to loosen mon-
some speculation that the UAE was already close etary policy is greatest in Saudi Arabia, the UAE,
to capacity, the energy minister has since clar- and Qatar, according to Capital Economics.
ified the country was producing at near to its “All told, we expect the Gulf economies to
baseline OPEC+ quota rather than close to its experience strong GDP growth this year and
maximum capacity. next. In line with our new view on OPEC pro-
Kuwait, as well as Oman and Bahrain (which duction, we have tweaked our growth forecasts
are not OPEC+ members but tend to shadow the over 2022-24. Our forecasts lie above the consen-
group), are more constrained in their ability to sus in most countries, says Swanston.™

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