Feature: Lower Gulf fiscal oil breakeven prices seen supporting easing of OPEC+ cuts

Dubai — Lower fiscal oil breakeven prices needed to balance Gulf budgets are expected to help support the easing of OPEC+ cuts as regional members of the alliance reap the benefits of higher crude prices, greater non-hydrocarbon revenue and restrained public spending.

Most Gulf countries, who are members of OPEC+, will see their breakeven oil prices ease in 2021, according to the International Monetary Fund and Institute of International Finance. Kuwait, Saudi Arabia and the UAE are members of OPEC, while Oman is part of the broader OPEC+ alliance. Kuwait is the only country out of the four that will see its breakeven fiscal price rise in 2021 due to its financial problems.

The easing of fiscal breakeven prices for Saudi Arabia, OPEC's kingpin, will draw it closer to Russia, its main ally in OPEC+ that has long based its budget on an oil price lower than most OPEC+ members.

Saudi Arabia and Russia, who clashed last year over the extension of OPEC+ cuts leading them to engage in a price war as they pumped at will, have seen their OPEC+ policies converge this year. Fiscal breakevens could help cement this rapprochement in their oil policies.

Greater Cohesion

Saudi Arabia's 2021 fiscal breakeven was seen lower at $75/b Brent from $86/b in 2020, thanks to austerity measures in the wake of last year's oil price crash, the elimination of monthly payments to state workers and the tripling of value-added tax to 15% to boost non-oil income, according to Paul Sheldon, chief geopolitical adviser for S&P Global Platts Analytics.

Export-weighted OPEC fiscal breakeven prices are forecast to average $91/b Brent in 2021, down from $102/b in 2020, mainly due to higher non-oil revenues and rising net oil exports as demand recovers in the second half of the year, he said.

"Saudi Arabia's 2021 fiscal breakeven price exceeds that of Russia by just $11/b, signaling greater cohesion on production strategy than would have been the case even in 2019, when the gap exceeded $30/b," said Sheldon. "Therefore, strategic cohesion with fellow OPEC+ leader Saudi Arabia on maximizing short-term revenue could persist for longer than many assume."

Fiscal breakeven oil prices are usually influenced by a drop in government spending, improvement in non-hydrocarbon revenues and an uptick in oil export volumes, according to Garbis Iradian, chief Middle East and North Africa economist for the IIF.

The tripling of VAT last year, the projected 6% cut in 2021 fiscal spending, and higher oil exports compared with 2020 in Saudi Arabia indicates the world's No. 1 oil exporter is more inclined to support relaxation of OPEC+ cuts.

"Such lower fiscal breakeven oil prices would be one of the main reasons why Saudi Arabia, the UAE and other major oil producers in OPEC+ ease the production cuts in 2021 and 2022," said Iradian.

Economic diversification

The current OPEC+ cuts, which are envisaged to last till April 2022, will be relaxed starting May.

The alliance agreed on April 1 to loosen members' quotas and add more than 2 million b/d into the market by July as they seek to reclaim market share amid a gradual economic recovery.

The increases will be phased in each month, and the alliance reserves the right to U-turn if market conditions deteriorate, Saudi energy minister Prince Abdulaziz bin Salman said April 1. OPEC+ ministers are planning to meet again April 28 to review their decision.

The April 1 decision still managed to push ICE Brent futures higher on April 1 to around $65/b and prices were still currently trading around that level as of April 22.

Even as oil prices edge higher, Gulf countries are looking at ways to lower their dependence on oil revenues by increasing taxes, curbing public spending and diversifying their economies. All of these policies will support lower break-evens into the future.

Future reforms

"GCC states are likely to keep spending targets conservative over the next couple of years in order to help plug deficits which have in some cases widened quite significantly during the pandemic, coupled with the lower oil prices and lack of demand for exports," said Neil Quilliam, an associate fellow at Chatham House and managing director at Azure Strategy.

However, some analysts doubt that fiscal breakevens are influencing OPEC+ policies, which are usually focused on seeking a balance between supply and demand and lowering inventories to their five-year average.

Besides, Gulf countries have tended to reverse course during periods of high oil prices and abandon reforms to appease their populations by spending more.

"The pace of reform is key looking forward as well as governments' responses when prices recover," said Bassam Fattouh, director of Oxford Institute for Energy Studies. "It has been the case that when prices rise, there is a tendency for the pace of reforms to slow and current spending to rise. Time will only tell whether it would be different this time."