Changes the Major Oil Producing Nations Face in 2019

But before reading any further, might I suggest pouring yourself a cup o’ joe and turning on Queen’s “Under Pressure”?

Heading into 2019, oil and gas operators were reminded of bleaker times, sparking concerns of what lay ahead in the new year. With Brent Crude falling below $50 a barrel in December 2018 for the first time since June 2017, it was hard to not fear the worst…a repeat of 2015, when we were very clearly ‘under pressure, under pressure’. For only the second time in five years, global oil producers were forced to stabilize the market by cutting production by 1.2 million barrels per day due to a precipitous drop in oil prices.

Although the recent fall in oil prices may resemble that of 2015, the future looks brighter. Having already adopted long-term initiatives and reforms to mitigate problems associated with low prices, many oil producers won’t have to resort to the same painstaking economic cuts they did in 2015. So, what challenges then lay ahead for some of the world’s major oil producers?

Russia

Russia took on a prudent approach to the former rising oil prices by transferring any oil revenue above $40 per barrel and depositing it in a “rainy-day” fund and/or to be used to reduce its debt. However, lower oil prices this year will likely lead to a budget deficit for Russia. But that’s only one of the financial concerns for Russia. Another concern of Russia’s long-term economic strategy is the threat that the U.S. will continue to expand its sanctions against the Kremlin in a number of fields, potentially against Russia’s energy pipelines (e.g. Nord Stream 2). Despite efforts to reduce its economic dependence on the West through ties with Asia, Moscow has seen little relief as a result of the US-trade war and subsequent downturn in Asian Markets.

Iran

Iran is projected to weather the hardest-hitting impact due to low prices. Oil exports in the country have already dropped by 1 million bdp as a result of the U.S. decision to reintroduce sanctions after pulling out of the Iranian nuclear deal. Moreover, if oversupply remains an issue, it’s likely that the Trump Administration will press Iran’s natural resource buyers (eight countries) to reduce or completely eliminate imports altogether from Iran. More concerning than the actual decline of oil itself, is the possibility that Iran will lose most of its customers sparking major political repercussions within its borders.

At the end of last year, President Hassan Rouhani shared Iran’s 2019-2020 budget based on the assumption of oil prices of $50 to $54 per barrel and roughly 1 million to 1.5 million bpd of oil exports. Assuming Iran reaches those level of exports, if coupled with U.S. efforts to restrict the country’s ability to attain hard currency, the republic will likely still face an economic recession.

Iraq

Iraq was finally able to see a budget surplus last year due to rising oil prices, and widely ostracized austere measures enforced by former Prime Minister Haider al-Abadi. In keeping with conservative price assumptions and measures, Iraq is in a position to utilize the capital to rebuild some of their damaged, war-torn areas. However, those plans are put at risk by a fall in oil prices.

Saudi Arabia 

In the new year, Saudi has advanced its Vision 2030 agenda. In 2019, Saudi Arabia has set its highest budget ever, which includes an increase in capital spending by 20 percent, meaning it needs an oil price of about $90 per barrel to break even. Given spending forecasts in light of low oil prices, it’s likely Saudi will continue to rack up debt at an unprecedented rate. However, with the proposed spending, Saudi can avoid making austere changes to the economy.

United States

In contrast to many of the aforementioned countries, cheap oil often acts as a positive economic driver of growth and prosperity for the developing world. Although the U.S. has experienced rising oil production across numerous basins, it remains an importer at the present (Energy Information Administration expects the U.S. to switch from being a longtime net oil importer to net oil exporter in the third or fourth quarter of 2020 marking a stark reversal from recent years). While weaker prices signify sluggish global outlook and U.S. commercial activity worldwide, low oil prices at the present could mean a net benefit to consumers, assuming prices don’t fall too low.

Within the oil and gas community, several shale producers have halted or greatly reduced drilling plans for 2019. However, many operators hedged when prices were high, and with the most productive and economic U.S. shale basins having a break even around $45-50 per barrel, lower prices may not be enough to greatly curtail production overall.

Venezuela

After historically depending on oil production for almost all sources of revenue, Venezuela is being forced to look for alternative sources of capital as it looks for cash anywhere possible. Oil production alone has fallen by roughly 1 million bpd since Q1 2018. It’s likely Venezuela will be forced to find alternative forms of revenue, such as that from illicit mining. To preemptively prevent crisis from spilling over and impacting neighboring countries, Brazil will partner with Washington and the administration in Colombia to enforce measures on Venezuela through sanctions and/or financial scrutiny. 

*Should Madura no longer be in power by the time you read this, you can disregard everything stated above.

Final Remarks

So, although 2019 doesn’t look at bleak as previous years, a drop in oil prices undoubtedly registers similar emotions to times of being “under pressure, under pressure”. Could one make the argument 2019 is to 2015 as Vanilla Ice is to Queen? It only seems appropriate to now open Spotify, crank up “Ice, Ice Baby” and be reminded of its reminiscent beats. With the decline in prices, I’m tempted to quote the ever-popular singer, “Will it ever stop? Yo, I don’t know”. Mic.drop.

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Caroline Charles

Sr. Account Manager

Engage Mobilize