OPEC output cut to weigh on Mideast, N Africa growth

Focus article by Nurluqman Suratman

SINGAPORE (ICIS)–OPEC-led crude output cuts will likely weigh down on the economies of the Middle East and North Africa (MENA), some of which are in the throes of geopolitical instability, according to analysts.

Eight of the 13 OPEC nations are in the MENA region – Algeria, Iran, Iraq, Kuwait, Libya, Qatar, Saudi Arabia and the UAE.

OPEC has committed to cut output by 1.2m bbl/day for six months starting January 2017, and freeze production at around 32.5m bbl/day.

Eleven other non-OPEC members, meanwhile, have agreed to slash production by 558,000 bbl/day in the first six months of this year.

The move was meant to address the global supply glut that has been weighing down on crude prices since mid-2014.

But it poses serious headwinds to Saudi Arabia, which agreed to cut its crude output in January to June 2017 by 486,000 bbl/day, which account for 40% of OPEC’s output cut commitment.

Saudi Arabia, which is the world’s largest oil exporter and the biggest economy in the MENA region, saw its full-year growth decelerate to 1.4% last year from the 4.1% pace registered in 2015, according to Spain-based research firm FocusEconomics.

The country’s economic expansion is expected to weaken further this year to 0.5% as a result of the crude production cut, it said.

Reduced global crude production, however, will likely cause energy costs to spike and hurt crude-importing nations in the MENA region, according to FocusEconomics.

The research firm expects that the 16-nation MENA 2017 growth to slow down to 2.5% in 2017, which will represent the weakest expansion since the trough of the financial crisis in 2009.

According to estimates, the region’s aggregate GDP posted a 2.8% growth in 2016, slightly higher than 2.7% recorded in the previous year, it said.

Although recent data corroborate that economic activity in the region accelerated slightly in 2016, it also revealed that economic improvements were not broad-based, according to FocusEconomics.

Tensions between the US and Iran, meanwhile, has recently heightened following US President Donald Trump’s decision to take a tougher political stance against the Middle Eastern country.

In his presidential campaign, Trump repeatedly bashed the Iran nuclear deal, saying that dismantling it would be his top priority.

In January 2016, international sanctions on Iran were partially lifted after an agreement was struck between the country and six major world powers, including the US.

Iran has scaled back its uranium-enrichment activities in exchange for the lifting of the economic and financial sanctions, which were imposed on suspicion that it was developing a nuclear weapon.

The Iranian economy is expected to be the best performer in MENA this year, partly on benefits from its reintegration into the global economy and stronger oil exports, according to FocusEconomics.

However, rising tensions between Iran and the US represent a major threat to Iran’s economic outlook, the research firm said.

“The early days of the Trump presidency already indicate a profound shift in US policy towards the Middle East, UK-based advisory firm Brunswick said in a report published last week titled “How will President Trump impact the GCC?”

The Trump administration’s immigration crackdown and refugee ban targeting seven Middle Eastern and North African countries – Iraq, Iran, Syria, Yemen, Somalia, Sudan and Libya –  prove to be early tests in diplomatic relations between the US and regional powers, it said.

Trump’s pledge to lead a resurgence in the oil and gas industry to create “complete energy independence” for the US could also weigh heavily on the MENA region’s economic growth, Brunswick said.

“An increase in US production could impact an already over-supplied global oil market, with a potential increase in production driving global oil prices lower, impacting GCC government revenues even further,” it said.

An increase in US energy production could impact an already over-supplied global oil market, with a potential increase in production driving global oil prices lower, impacting GCC government revenues even further, the advisory firm added.

While Trump has “shown flexibility on many of his pledges, the one area he has shown consistency and made appointments in line with his stated stance is on trade, moving the US in an mercantilist direction”, Emad Mostaque, strategist at consulting firm Ecstrat , said in a note for investment research and analysis firm Smartkarma.

“If trillions of dollars leaving US shores for cheap goods from China is intolerable, the idea of being dependent on OPEC oil, produced at a significant discount, is even worse,” he added.

Trump has repeatedly accused China of maintaining an artificially weak currency and could soon officially label the country as a currency manipulator unless the country enters into talks with the US to help lower its trade surplus, according to media reports.