IEA makes forecasts on impact of lower oil prices on producers

Oil&Gas Materials 17 March 2020 10:47 (UTC +04:00)

BAKU, Azerbaijan, March 17

By Leman Zeynalova – Trend:

Lower oil prices are expected to put severe fiscal strain on a number of the most important producers, Trend reports citing the International Energy Agency (IEA).

“Today, we are witnessing another shock, this time from both the demand side (the coronavirus impact) and a surge in supply. In many producer economies, public finances are in worse shape today than they were five years ago, leaving them even less able to absorb the shock. And the coronavirus is set to provide a huge test for the countries’ social and health infrastructure,” IEA said in its report.

In an updated analysis, IEA experts have modelled what impact the change in the market conditions over the past week could have on key producers.

“Using the IEA’s World Energy Model, we considered the combined impact of declining overall demand for oil in 2020 (based on the IEA’s latest Oil Market Report), a surge in supply by some low-cost producers, and a price assumption for the year that averages USD 30 a barrel (note that this would be an average for the year, after Jan-Feb when Brent was at roughly double that level). The results are startling. Under these assumptions, oil and gas income for some key producers would fall between 50 percent and 85 percent in 2020, compared with 2019. This would represent these producers’ lowest income in over two decades,” reads the report.

In some cases, the price effect is somewhat mitigated by higher output, according to IEA.

“But in all cases, there is a sharp drop in income of at least 50 percent compared with 2019. Many producers face the dual impact of lower volumes and lower prices, with a resulting year-on-year fall in income of up to three-quarters. The impact of this drop in income will be felt across the board. Producer economies have not fully recovered from the previous price collapse in 2014. For example, per capita GDP in Nigeria in 2018 was one-third lower than it was in 2014, meaning that in many ways, Nigeria is less prepared to deal with a price shock than it was five years ago.”

“Lower oil prices are expected to put severe fiscal strain on a number of the most important producers. In Iraq, the current price would imply a monthly budget deficit of USD 4 billion simply in order for the country to meet existing obligations for salaries, pensions and other current spending. The country would have to go even deeper into the red if it wanted to proceed with any investments in much-needed capital projects such hospitals, schools, roads and power plants. This strain will exacerbate the pressures on Iraq’s health service, which is already underfunded by regional standards,” reads the report.

As well as the likely widening of fiscal deficits, the countries’ decreased export revenues will impact their overall trade balances, leading to downward pressure on their currencies, according to IEA forecasts.

“For a number of producers that have exchange rates pegged to other currencies, this would require a drawdown of crucial foreign exchange reserves to maintain currency stability. Oman, which runs one of the largest fiscal deficits in the world and has the highest current account deficit of all countries in the Gulf Cooperation Council, is particularly vulnerable in this regard. The impacts would not be limited to the Middle East. For example, Ecuador’s oil and gas income is projected to fall by 85 percent compared with last year, compounding an already difficult situation for a government that only recently announced a $1.4 billion reduction in public spending.”


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