The OPEC and non-OPEC countries in Doha are meeting over the weekend of 17 April 2016, to discuss stabilising prices through possible production freezes. It is however felt that it may have little impact on the current market conjecture. No dramatic rise in the price of oil is foreseen mainly because of the current geo-strategic tensions and uncertainties in the world economy. Euphoric analyses should be avoided although the price of oil course despite the geo-strategic tensions particularly those between Iran and Saudi Arabia coupled with uncertainties of the world economy, have had recently some slight facelift, ending this 14th April morning, for the American WIT at $41.59 a barrel and for the Brent at $43.89 with $1,1383 / Euro. This is in no way a spectacular comeback, given that it is a freeze and not a decrease in production that is planned with a surplus of some 2.52 million barrels per day in the first quarter of 2016. But what of the great absentee, i.e. the United States of America which is one of the largest producer and soon one of the world’s largest exporter, and the specific cases of Iran which warned that it intends to first and foremost reach a production of 4 million barrels a day prior to considering a freeze on its production. Iraq and Libya who also are in desperate need of funds so as to rebuild their wrecked economies. Then, what of the world’s largest producer that is Saudi Arabia? To study the evolution of prices in the energy sector, we should be sticking to the fundamentals or to basics in addition to geo-strategic issues, the price of oil having undergone changes that one report of 13 April 2016 as being ephemeral. The IMF has since then revised downward the growth prospects of the world economy from 3.1 to 3.2% for 2016 against a forecast of 3.4% and 3.5% in 2017.
1 – In a speech to the Who’s Who of global finance meeting in Washington for the traditional spring of the Fund and the World Bank meetings, M. Obstfeld, former economic advisor to US president Barack Obama, did not hide his concern, stressing with force that “our forecasts are less optimistic. Despite the accommodative monetary policies ((almost zero interest rate) of both the FED and the ECB, the request, whether it’s for consumption or investment, is at half-mast). The various scandals revealed at the global level by the “Panama papers” regarding tax havens with others to be be unveiled shortly involve the improvement of the functioning of the international monetary system, the financial stability of the markets, and especially the morality of international relations by a greater international cooperation that also affects the fight against the omnipresent global threat of terrorism. Brazil plunged into a serious political-financial crisis, and Russia, should know recession in 2016/2017 with a GDP declining in 2016 respectively by 3.8% and 1.8%. China would have a growth of 6.5% with the risk of creating new financial turbulence. The IMF forecasts weak growth for all advanced economies: its estimates for the United States and the Euro zone are even less than previously planned (−0.2 point), with a growth of 2.4 and 1.5%, respectively and even Japan should know recession in 2017. In general, according to the IMF, weak manufacturing activity and trade cannot be explained only by the development of China but also by the ‘moderate’ nature of demand and investment in general.
“Financial tensions in many oil-exporting countries reduce the capacity of these countries to mitigate the shock, resulting in a significant decline in their domestic demand.” Investment in the extraction of oil and gas having declined, “which amputates also global demand”, the perspectives do not encourage optimism. “The risks are rather bearish”, according to the IMF listing them in this order: a net slowdown in China, a stronger appreciation of the greenback and a tightening of conditions of finance at the global level and, a thrust of global risk aversion and an escalation of geopolitical tensions. These uncertainties, quoting the IMF could “derail global growth if these important pitfalls are not well managed.
The impact on the Algerian economy which being totally externalized and dependent on the evolution of the global economy through its semi “annuity” of hydrocarbons that represent directly and indirectly 98% of its foreign exchange earnings and with imports represent 70% of the needs of households and public and private companies with an integration rate not exceeding 15%. Despite all those disconnected speeches from reality, exports of its private sector, of whom more than 97% are not very innovative, often indebted to banks, SMB’s struggle to reach 1%. As from the IMF downwards revision of its forecast of growth of the world economy, it is feared a global financial bubble between 2017 and 2018, would result in a slowdown in the demand for oil with depressed oil prices.
The IMF report notes that for 2017 Gross Domestic Product (GDP) growth would be 2.9% in 2017 against 3.4% for 2016. The IMF forecasts a deficit of the Treasury for Algeria of 17.1% at the end 2016 compared to 15.7% in 2015 prior to stabilizing at 16.2% in 2017. As it provides a ‘degradation’ of the labour market, where unemployment rate will tend to go the opposite way to 12.1% in 2017 against 11, 3% in 2016. The rate of inflation calculated by the IMF is somehow biased by including subsidised products (bread, milk, fuel, water, electricity etc.) otherwise the national rate would be higher than 5% praising the problem of profitability of the current national loan whose rate is 5% in the medium term. Also, for Algeria to face these uncertainties about its future, it has to have a strategy of adaptation simply because of its lack of influence on oil prices (the price of gas is indexed to that of oil) and thus the decline in revenue of the country’s main source of finance SONATRACH.
2 – For the next meeting of the OPEC/non-OPEC countries, the euphoric analyses should be avoided and not be expected according to the IEA to a spectacular comeback, the price of crude oil being basically a balance determined by an agreement between the USA, not affected by this meeting and Saudi Arabia and to a lesser extent by the position of two other major producers Iran and Iraq who intend to increase their production. The oil price having certainly had a slight rise recently helped the Algerian Dinar to skid down to 122.275 to €1 and 107.700 to $1, the country is advised to stick to the fundamental nine principles below.
First, the essential reason for the fall in the price of oil from June 2014 was due the weakness of growth in the world economy as highlighted above.
Secondly, on the supply-side, we are witnessing increased faster than expected from the USA non-conventional oil production upsetting the world energetic map. These will soon start to export in 2017 to Europe competing strongly against the weakest Algeria and incidentally Russia.
Thirdly, the rivalries within OPEC with some not meeting their quotas, although this organization represents only 35 / 40% of world production, 60 / 65% being non-OPEC, as well as that of Iran-Saudi Arabia (more than 35% of the OPEC production), who do not want to lose their market share.
4, the strategic expansionist Gazprom, of Russia which has always so far benefited from the drop in quotas of OPEC to increase its market share, has great need for financing; tensions in Ukraine have in no way affected its exports in Europe where its market share was 30% between 2013/2015 compared 8 / 9% for Algeria.
5, the return to the market of Libya’s 800,000 barrels per day could go to 2/3 million barrels. in the near future. Iraq with 3.7 million barrels a day (at a production cost of less than 20% compared to its competitors) that can go to more than 5 million per day is in need of funding and intends to penetrate the Asian market. Iran, has reserves of 160 billion barrels of oil and could easily export between 4/5 million barrels day. It has the second reserve of traditional gas with more than 34,000 billion cubic meters, not to mention that it will then have access to some of its sanctions related $100 billion blocked in foreign banks, which could increase its exports and attract foreign investment.
6, USA/Europe that represent more than 40% of world GDP for a population of less than a billion inhabitants pushing towards energy efficiency with a forecast of 30% reduction in 2030, confirming the future is made of hydrogen and renewable energy. Also, prospects by 2017/2020 have the strategic goal of strengthening energy efficiency as per a controlled energy transition process, as per the important resolutions agreed at the meeting of the COP21 in Paris on global warming particularly in the building and transport sectors.
7, the trends are a new division and international specialization with the concentration of manufacturing industry, strong consumer of energy in Asia which will absorb 65% of consumption worldwide by 2030, mainly from India and China. Customer relations – providers will be to their benefit to have comparative advantages and will push to lower prices.
8, occupation by terro€rists of oil and gas fields and flows on the black market in Iraq for a barrel between $30/40
9, the evolution of the exchange rate of the Dollar and the Euro, any increase in the Dollar, with the recent decision by the FED to raise the interest rate affects the oil price down, well that exists no linear correlation.
In summary, the GCC countries recorded in 2015 a total deficit of $160 billion (€140 billion) against an overall surplus of 220 billion (€193 billion) in 2012. Member of the Council of cooperation of the Gulf (GCC) countries should borrow between 250 and €342 billion by 2020 to finance their budget deficits resulting from the fall in the price of oil according to the report of the Kuwait Financial Centre (Markaz) of March 2016. Saudi Arabia, Bahrain, the United Arab Emirates, Qatar, Oman and Kuwait, which depend on oil revenue, could accumulate a deficit of $318 billion dollars (€279 billion) for the only years 2015 and 2016. With the exception of Bahrain and Oman, the other members of the GCC have huge reserves and low debt that enable them to easily mobilize loans on their domestic market and abroad. And the countries the hardest hit are, respectively, Nigeria (drop drastically change reserves $ 28 billion by 2015 with an inflation rate of 10%), Venezuela (in semi – bankruptcy with 180,5% inflation rate in 2015 and less than $ 15 billion of reserves), Russia the Ruble has lost more than half its value (65.94 a Dollar and over $40/50) foreign exchange reserves could be depleted by 2020) and Algeria with an accelerated drift of its Algerian Dinar to 122.275 a euro and DA107.700 to one dollar on April 15, 2016, of which foreign exchange reserves decreased from $192 billion in 2014 to 143 billion to 01 January 2016.
Written by Professor, Dr Abderrahmane Mebtoul, International Expert – 15 April 2016