There have been significant changes to the demand and supply patterns for crude oil in 2020 due to the indefinite impact of the Covid-19 pandemic. As a result, prices have been very volatile but have persistently trended downwards year to date. Due to widespread lockdowns as well as border and travel restrictions, demand for crude has taken a massive hit, while on the supply side, the Organisation of the Petroleum Exporting Countries (OPEC) and its allies have intervened in the market to support prices by trimming output. The outlook for any substantial price recovery beyond 2021 is particularly unclear. This relatively bearish outlook would have implications for many emerging markets, as most are highly dependent on commodity exports, including some of the Caribbean countries like Trinidad and Tobago, Suriname and, more recently, Guyana.
As some of the world’s largest economies started reopening their economies, albeit in phases, prospects for petroleum demand cautiously improved. In its July 2020 Short-Term Energy Outlook (STEO), the US Energy Information Administration (EIA) estimated that global oil demand increased six per cent from May to June 2020 to 89.5 million barrels per day (b/d). However, more recently, major oil consumers such as China and the US have reverted to some measures of localised lockdown due to a resurgence in cases of Covid-19. The US is the world’s largest consumer of oil, accounting for just under 20 per cent, followed by China. China has however had the fastest consumption growth for many years. The prospects for the global economy are inundated with downside risks. The IMF projects that the global economy will contract by almost five per cent in 2020, with projections showing an eight per cent contraction in the US economy and marginal growth of 1 per cent for China – diverging from average growth of 6.2 per cent recorded over the preceding five years. India, the world’s third largest consumer of oil, is forecasted to decline by a significant 4.5 per cent in 2020.
On the supply side, production cuts by OPEC members, including Venezuela, Iran and Saudi Arabia, more than offset the strong growth in output from the US and helped to stabilise prices to average around US$37.62 per barrel year to date, relative to the 2019 average of US$57.04 per barrel.
Up to the end of 2019, global oil demand would have recorded its tenth consecutive year of increase. In its July 2020 monthly report, OPEC estimated that total world demand for oil will contract by 8.9 per cent in 2020, but forecasted to strongly rebound to growth of seven per cent in 2021, driven by “improvements in economic momentum”.
An extended period of low energy prices will be disastrous for commodity-exporting economies, which rely heavily on the energy sector. In many of these countries, revenue from the energy sector is used to fund many social programmes – as in the case of Saudi Arabia, Kuwait and the UAE. The extent to which commodity exporters are likely to be affected by persistently low prices will be determined largely by each country’s break-even price for oil, which can be viewed as the price needed to balance the national budget. These prices vary extensively, from US$195 for Iran to US$27 per barrel for Norway. Middle East oil giant Saudi Arabia, whose oil industry accounts for 70 per cent of the country’s export earnings, requires a price of US$84 per barrel to balance its budget.
Another factor which will determine how well commodity exporters are able to withstand an oil price shock will be the availability and size of financial buffers. Based on data from the World Bank (presented in Figure 2), countries in the Caribbean and Latin America seem to have the very low financial reserves on a per capita basis and therefore have the least buffer, compared to countries like Qatar, Norway and Saudi Arabia.
The outlook for oil prices remains extremely uncertain based on the evolution of the pandemic as well as global geopolitical and trade developments. Weaker projected global economic growth is likely to place substantial downward pressure on energy prices. The extraordinary level of coordination between OPEC and non-OPEC countries has supported oil prices from dropping even further by limiting output against a backdrop of falling demand largely due to Covid-19. Unfortunately for commodity exporters, this unprecedented degree of uncertainty will negatively impact the economic outlook for many who rely heavily on the energy sector as a major source of government revenue and foreign exchange earnings. The EIA projects that WTI crude oil will end 2020 at a price of US$37.55 per barrel, to increase to US$45.70 in 2021, while Brent crude oil is forecasted to end 2021 at US$49.70. Accordingly, oil-dependent sovereigns may be in for a few years of weaker growth, wider fiscal imbalances as well as weaker external liquidity.
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