March 12, 2016
Oil rally is too little, too late for cash-strapped producers
“Even if the recent uptick in oil is sustained, the vast majority of sovereign producers are facing difficult outlooks for the rest of 2016,” said Helima Croft, global head of commodity strategy at RBC Capital Markets, in a report Friday.
The roughly 70% decline in oil prices since their 2014 peak has forced OPEC members to tighten their belts by cutting spending, mobilizing foreign-exchange reserves and seeking loans. This in turn has put their credit ratings at risk of downgrades, according to Croft.
© Provided by MarketWatch Oil rally is too little, too late for cash-strapped producers Moody’s Investors Service last week placed ratings of several countries on review for possible downgrades, citing a prolonged slide in oil prices, including Russia, Qatar, Saudi Arabia, and Kuwait. Lowered sovereign credit ratings can make it more expensive for a country to borrow funds, further exacerbating their financial positions.
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With the prolonged nature of the current price environment, the potential call on these funds to cover fiscal deficits could be as high as $236.5 billion this year, as much as 56% of which stems from OPEC sovereigns.
Helima Croft, global head of commodity strategy at RBC Capital Markets
Many of the oil-dependent economies have had to dip into their sovereign-wealth funds to make up for fiscal deficits and such withdrawals are expected to accelerate if oil prices don’t significantly recover.
Sovereign-wealth funds are typically financed by surpluses in a country’s balance of payments, foreign exchange reserves, and commodity exports. Of the approximately 70 sovereign-wealth funds in operation, slightly more than half are funded by oil receipts.
In October, Russian Finance Minister Anton Siluanov said its Reserve Fund is likely to be depleted this year as the country continues to rely on the fund to make up for its budget shortfall.
Assets under management at these funds—estimated at $7.1 trillion—have stagnated since 2014 when crude began its plunge.
“With the prolonged nature of the current price environment, the potential call on these funds to cover fiscal deficits could be as high as $236.5 billion this year, as much as 56% of which stems from OPEC sovereigns,” Croft said.
The fiscal break-even point for members of the Organization of the Petroleum Exporting Countries is $98.83 a barrel, said the RBC strategist.
Oil futures climbed on Friday, with prices set for a weekly gain of nearly 8% after the International Energy Agency said that prices have been bolstered by lower supply. Brent crude rose 54 cents, or 1.4%, to $40.59 a barrel while April West Texas Intermediate crude gained 87 cents, or 2.3%, to $38.71 a barrel.
However, the agency warned that the recent rebound may be short-lived as outlook on demand remains uncertain amid a global economic slowdown.
“For prices, there may be light at the end of what has been a long, dark tunnel,” the Paris-based IEA said. “But we cannot be precisely sure when in 2017 the oil market will achieve the much-desired balance.”