Oil cuts are extended but the non-oil sector remains robust

OPEC+ extends cuts into Q2

In the first few months of 2024, Brent crude traded around $80 per barrel, on par with its average price during 2023 (down from $101 per barrel in 2022). This is a fairly comfortable price for most of the region states, above the fiscal breakeven for all except Bahrain and Saudi Arabia.

There are significant variations in forecasts for oil demand. Based on OPEC’s February oil market reports, OPEC was anticipating 2.3m b/d in demand growth whereas the International Energy Agency (IEA) expected only 1.2m. The difference between them is greater than the combined crude production of Oman and Bahrain, or greater than the latest round of Saudi cuts. In addition, most forecasters expect that non-OPEC+ production, mainly from the US, Guyana and Brazil, will grow by at least 1.3m b/d.

This all means that if oil demand growth trends are in line with the lower IEA forecasts, non-OPEC supply could fully meet the additional demand. This would make it difficult for OPEC+ to increase its production without risking a decline in prices. Because much of the oil demand growth is expected in the second half of the year, OPEC+ decided on March 3, 2024 to extend through the second quarter, the 2.2m b/d of additional voluntary cuts that eight of its members have been implementing since January, led by the -1m b/d commitment from Saudi Arabia. In the second half of the year, the plan is to gradually taper these cuts “subject to market conditions”, although some analysts anticipate that they could remain in place for most of the year.

The pledged output levels in H1 2024 are -7% below the average 2023 production levels of Kuwait, Oman and Saudi Arabia, bringing their output levels back to where they were in 2022, on average. These cuts mean that economic growth in these countries will be much lower than had been forecast with, for example, the International Monetary Fund’s (IMF) October report projecting around 3% oil sector growth in each of these three countries. Now, even if cuts are tapered significantly in H2, all will likely see an average annual contraction in the sector.

The UAE’s quota is only -1% lower than last year’s average output because its base quota (before voluntary cuts) received a small uplift this year, as had been agreed in June. Meanwhile, although Iraq has pledged voluntary cuts, its output last year lagged behind its quota. Bahrain has made no additional pledges, but it suffered maintenance outages last year and, if it manages to produce at quota now, this will result in a small uplift.

Oil production trends

Source: OPEC; 2022-23 production based on official figures

Comparing the current pledged output levels with actual production capacities gives a very different picture of which countries are bearing the biggest burden. The UAE’s current pledged level of 2.9m b/d is about a third below its capacity and Saudi Arabia’s 9m is a quarter below. By contrast, Oman, Iraq and Kuwait are less than a sixth below their capacities and Bahrain is near to capacity.

The production cuts look likely to have a significant impact on revenue compared with what had been assumed last year when budgets were being developed. The IMF forecast an aggregate general government surplus for the GCC of 3% of GDP this year, with oil at $81 (in line with current trends) but production significantly higher (for example, it assumed 10.6m b/d for Saudi Arabia, compared with the current quota of just 9m). UAE, Oman and Qatar are likely to still post surpluses, but deficits will be several percentage points wider in other states as a result of the production cuts.

KSA pauses expansion while Qatar doubles down

Given supply/demand dynamics and the risk of increasing supply from non-OPEC+ countries, KSA has moderated its ambition to increase production capacity. In February, Saudi Aramco announced that it was suspending various projects, including a 700k b/d planned expansion of the Safaniya oil field. It also stated that it would no longer be targeting a +1m b/d increase in its “maximum sustainable capacity” to 13m b/d. No forecasters had anticipated Saudi Arabia producing close to its existing 12m b/d capacity in the coming years and therefore the change in investment plans will not impact output, but will free up capital to put into other projects, such as gas and renewables. In fact, Aramco recently announced a 15% increase in the proven reserves at the giant Jafurah gas field, which is a significant development.

Meanwhile, Qatar made a significant announcement on gas, unveiling plans for North Field West, which will be the third phase of its ongoing LNG expansion. The project, due to be completed by 2030, will add 16m t/yr of LNG, equivalent to a fifth of current output, along with valuable byproducts such as condensates and LPG. This adds to the North Field East and South phases, which are due to add 48m t/yr during 2026-27. The expansion followed exploratory work that further extended the confirmed reserves of North Field, the world’s largest gas field, and recent progress in signing long-term contracts, mainly with 27-year durations, for half of the gas from the existing expansion phases.

Non-oil growth looks robust

The region continues to focus on the next phase of diversification and development, driven by government investment and reforms to attract private investments. The picture is mixed, but overall non-oil trends look robust. The IMF’s October 2023 forecasts see non-oil growth averaging 3.9% in the GCC this year, only slightly down from its estimate of 4.2% for 2023.

The available part-year outturn data for 2023 shows several states surpassing the IMF’s estimates, notably the UAE, which clocked up 5.9% y/y growth in the first half of the year, driven by Abu Dhabi which was also up by 8.6% y/y in the first nine months (the federal level Q3 data is not yet available), while Dubai’s diversified boom is continuing. Given this, it is no surprise that the UAE’s PMI hit a four-year high of 57.7 in October. It has cooled a little since then to 56.6 in January, but this still indicates strong non-oil expansion, as does the 55.4 reading in Saudi Arabia.

Conversely, Kuwait and Qatar are not currently achieving the IMF’s estimates for growth, largely because of slower growth in the manufacturing and construction sectors. This has also been reflected in Qatar’s PMI, which has trended down to the breakeven level of 50.

Non-oil real GDP growth (% y/y)

Source: National sources, IMF; *UAE and Qatar are only H1-24