Middle East Quarterly

Published at 13:56 21 Jun 2016 by . Last edited 11:17 22 Aug 2019.

The recent rally in crude prices, with global benchmarks up to $50 per barrel in early June, will be welcomed by oil exporters across the Middle East and North Africa. However, these price levels will not generate enough revenue to fully cover government spending, especially in countries—such as Libya—which are experiencing sustained production disruptions.

As such, countries across the region are still pursuing various approaches to reducing public spending. In our first In Focus: What Vision 2030 means, we examine the implications of the high profile reforms being rolled out in Saudi Arabia. These are the brainchild of Deputy Crown Prince Muhammed bin Salman, and reflect the input of a surfeit of management consultants.

Much change is afoot in Riyadh, including a reshuffle that replaced long-serving oil minister Ali al-Naimi, but we can find no evidence of dramatic shifts in Saudi oil policy. Productive capacity will stay at 12.5 mb/d until at least 2020, with the aim to maintain spare capacity at around 1.5 mb/d, and there are no plans to try and flood the market with excess production. The new energy minister, Khalid al-Falih, will be kept busy managing his broad portfolio and overcoming the hurdles to the IPO of 5% of Saudi Aramco. But as far as oil policy is concerned, the outlook is one of continuity rather than change, despite recent market speculation.

Indeed, this was a message al-Falih went to great lengths to communicate when he attended his first OPEC meeting in Vienna at the start of June. While the group once again failed to agree a production freeze deal, or even set a collective quota, the tone was notably more positive than at previous meetings, potentially laying the groundwork for future cooperation. The mood in Vienna was undoubtedly helped by the gathering pace of rebalancing in oil fundamentals, with non-OPEC supplies in steep decline, and many OPEC producers outside of the Middle East suffering a similar fate.

Here, the future of Iraq becomes critical, as it has been amongst the handful of countries where production is still on the rise. In our second In Focus: Can Iraq surprise again?, we examine the outlook for Iraqi production, which has grown thanks to the launch of the Basra Heavy grade in June 2015 and the ramp-up of Kurdish exports. Strong y/y growth has continued through to May this year, but output is yet to surpass the level reached in January, and increasingly, the cracks are showing, as a consequence of the deepening financial crisis that has led to much lower upstream investment.

Already, several Kurdish fields are declining rapidly and as we enter H2 16, we anticipate decline rates will start to weigh on several of the large fields in southern Iraq. Overall, we expect total Iraqi production, including Kurdish output, to fall to 4.1 mb/d by year-end, and then stabilise there in 2017. Basra exports will slip to around 3.1 mb/d and Kurdish exports will be rangebound at 0.45-0.50 mb/d.

Another key supply story for the year is, of course, the return of Iranian production since sanctions were eased in January. Exports have risen to 1.8-1.9 mb/d and underlying production has recovered faster than we initially expected, but much is still uncertain about where Iranian production will be able to head from here. This is a topic we expect to cover in the next edition.

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