Oil price drops to lowest level for 18 years

The price of Brent crude oil fell to less than $23 a barrel on 30 March, its lowest level since November 2002.

The grounding of planes, lockdown of public transport and many companies closing operations has resulted in the oil price falling to $22.58 a barrel- below levels reached in the global financial crisis of 2008.

The collapse of the Opec+ oil production cut alliance in early March, and the subsequent ramp up in production from Saudi Arabia and Russia, has exacerbated the problem.

The drop in oil price is already starting to have significant repercussions in the Gulf region, with hydrocarbons contributing to about 91 per cent of government revenue for the GCC and Iraq, and contributes about 40 per cent of GDP.

Earlier this week, S&P Global Ratings downgraded its sovereign credit rating for Oman and Kuwait as a result of the economic impact of the Covid-19 virus outbreak and falling oil prices.

The ratings agency downgraded Oman’s long-term foreign and local currency sovereign ratings to BB- from BB as a result of the sharp fall in oil prices in 2020. According to S&P, the lower oil prices will increase fiscal and external pressures on the sultanate’s government balance sheet.

The impact of lower oil prices will be intensified by large upcoming eternal debt maturities in 2021-22 and high fiscal deficits. This could increase funding pressures and borrowing costs, according to S&P. When S&P published its previous ratings, it had forecasted oil prices would average $60 a barrel (bl) in 2020, declining to $55 in 2021. However, in March the ratings agency changes its average oil forecast for 2020 to $30/bl, rising to $50 in 2021.

Hydrocarbon products account for 35 per cent of Oman’s GDP, 60 per cent of current account receipts and 75 per cent of fiscal receipts, and S&P has downgraded the sultanate due to its “limited space to adjust gradually” to the lower oil price.

S&P also lowered its long-term foreign and local currency sovereign credit ratings on Kuwait, from AA to AA- as a result of the fall in oil prices and the country’s slow progress with reforms. The ratings agency also lowered its transfer and convertibility assessment for Kuwait to AA from AA+.

The ratings agency stated that Kuwait’s trend real GDP growth was below that of countries with a comparable level of development, and the fall in oil prices have increased the economic risks for the country. While Kuwait may follow Saudi Arabia’s lead and ramp up oil production in response to the collapse of the Opec+ agreement, this is likely to be offset by the sharp fall in oil prices.

Kuwait’s slow progress with economic reforms was another factor behind the S&P downgrade, with the ratings agency pointing to the government’s inability to implement reforms since the fall in oil prices in 2014 as a causal factor.

While S&P affirmed its B+/B long and short term credit ratings for Bahrain, it revised its outlook for the country down to stable from positive as a result of the fall in oil prices and predicted increase in current account deficits. The ratings agency affirmed its B+/B rating as a result of the provision of zero interest loans from neighbouring GCC countries and expected timely financial support if required.

S&P affirmed its credit ratings for Qatar, Saudi Arabia and the UAE in spite of the sharp drop in oil price. For Saudi Arabia, the region’s largest economy, S&P said its strong net asset (stock) position on both fiscal and external balances continues to offer strong ratings support. However, it said that a prolonged drop in oil prices would weaken its net asset stock and put pressure on ratings.