BofA: Oil rally and EU bid to cut reliance on Russian crude set to boost GCC finances

Crude prices may average $110 a barrel this year if the conflict in Ukraine is resolved quickly, Bank of America says

Riyadh. Saudi Arabia's fiscal surplus may rise to 10 per cent of GDP, with oil prices averaging $110 a barrel. Reuters

GCC oil-exporting economies will benefit from higher crude prices and the EU’s efforts to find new energy sources as the bloc looks to reduce its reliance on Russian hydrocarbons, said Bank of America.

With the higher oil windfall “we will see fiscal surpluses in all of the Gulf countries”, this year, said Jean-Michel Saliba, a director and Mena economist at BofA.

Oil prices surged past $130 a barrel on Tuesday, their highest since 2008, after US President Joe Biden announced that the US would ban crude, gas and coal imports from Russia.

The move tightened US sanctions on the world's second-largest energy exporter after its military offensive in Ukraine.

Prices eased after the UAE envoy to the US said the country supports increasing output in tight market conditions.

Brent, the global benchmark for two thirds of the world's oil, hit $116.60 a barrel while West Texas Intermediate, the gauge that tracks US crude, was at $112.60 at 12.39pm UAE time.

The US move to ban Russian oil, about 3 per cent of its crude imports, is intended to freeze the country out of markets and isolate its economy.

Russia supplies about 40 per cent of Europe's gas and 30 per cent of its oil.

The EU has not followed the US with an outright ban but said it will phase-out Russian hydrocarbons by the end of this year and look for alternative sources of oil and gas in the meantime.

BofA expects oil prices to average $110 a barrel this year if the conflict is resolved quickly. However, in the worst-case scenario, where energy supplies are severely affected, the average price may jump to $130 per barrel in 2022.

The higher average oil price reflects extreme volatility and oil at $130 a barrel will put energy, which accounts for 8 per cent of global gross domestic product, “firmly in the place where we are invoking demand destruction”, said Hootan Yazhari, Mena and global frontier market research head at BofA.

The average oil price at such an elevated level is “very detrimental”, he said.

The economic momentum in the broader Mena oil-exporting countries has been picking up, with crude prices surging 67 per cent last year.

For Saudi Arabia, the world’s largest exporter of crude, every $10 increase in the price of a barrel of oil will boost its GDP by 0.5 per cent. If oil averages $110 a barrel, that would translate into a fiscal surplus of 10 per cent of GDP.

Kuwait stands to gain the most in terms of its fiscal balance with higher oil prices and Bahrain the least, Mr Saliba said.

Qatar, one of the world’s biggest natural gas producers, will be a “winner” along with Egypt in the potential supply of gas to the EU. However, the near-term upside is limited as output increases over time to meet demand.

The volatility caused by the Russia-Ukraine crisis could result in a greater push to develop spare capacity in the GCC.

The geopolitical uncertainty in the region will mainly stem from developments related to Iran and talks to revive country's nuclear deal.

Gulf countries have traditionally relied on the sale of hydrocarbons for most of their revenue. However, governments have introduced reforms and economic transformation programmes over the past few years to diversify their economies and reduce their reliance on oil.

“We have not seen the commensurate increase in budget oil price assumptions,” Mr Saliba said. “These remain conservative, which suggest that there is an element of spending control when it comes to budget policies.”

The fiscal reserves of GCC states will receive a boost this year. Saudi Arabia can channel some of the oil windfall to its sovereign fund, the Public Investment Fund, and use it to bridge funding gaps for the mega projects it has lined up as part of its Vision 2030 programme, he said.

The kingdom fiscal surplus this year bodes well for economic growth, Mr Saliba said.

The continuing reforms in the UAE have also boosted its medium-term outlook. The country’s budget remains conservative, with the government aiming for a fiscal balance in 2024.

Furthermore, the introduction of a corporate income tax going forward will “also help in this respect”, he said.

“We think it will also nudge development of the higher value-added sectors [of the economy] over the medium term,” Mr Saliba said.