How Crude Prices Are Impacting Middle Eastern Markets

OPEC's Strategy to Edge Out Shale Producers

Getty Images / Lee Woodgate.

Crude oil prices have experienced a remarkable decline throughout 2015, with the combination of slower global growth and rising U.S. shale production. While consumers may be benefiting from sharply lower energy prices, shale producers have started accruing losses and many Middle Eastern countries are facing budget crunches from the lower prices, especially as global growth has slowed throughout much of 2015.

In this article, we’ll take a look at the dynamics behind crude oil prices and how they are impacting investors in Middle Eastern markets.

Maintaining Production

The Organization of Petroleum Exporting Countries – or OPEC – surprised the world by keeping production unchanged in November of 2014. With U.S. shale producers bringing new rigs online, the market expected Saudi Arabia and other cartel members to cut back on their production in order to maintain high prices. The group instead opted to maintain production in order to squeeze shale producers’ profit margins and force U.S. production to slow.

The decision created a dramatic increase in supply that the cartel hoped would only be temporary, but the actual impact turned out to be far more pronounced than they imagined. With prices hovering around $115 per barrel when the decision was made, crude oil crashed to below $45 per barrel in 2015 in response to greater supply and lesser demand.

Despite the steep decline in price, many OPEC producers have opted to continue pumping the same or higher levels of crude oil. Saudi Arabian officials told the Financial Times that they see no reason to slow the supply of crude oil in advance of the cartel’s December meeting.

Impact on the Middle East

Many Middle Eastern crude oil exporters are betting that the U.S. shale boom will shake out over the next couple of years, which will help prices rise back to a $70-80 per barrel range by 2017.

By placing the long game, these producers hope to thwart potentially long-term pricing dangers posed by shale producers, which could help the U.S. achieve energy independence over a few short decades, according to IEA estimates.

The problem is that crude oil revenue plays a significant role in many Middle Eastern markets, including Saudi Arabia’s economy. By some estimates, oil sales account for roughly 80% of the country’s revenue during normal years. The lack of crude oil revenue has sent its public debt soaring to 20% of gross domestic product in 2015, which prompted the International Monetary Fund to urge spending cutbacks to help offset the debt increases.

These dynamics have been even more painful in other countries, like Russia, that have experienced somewhat of a collapse throughout 2015. In fact, the IMF warned that it could take years for countries in the region to recover from lower oil prices, with the budget deficit of the six major exporters looming at $700 billion. The six worst-hit countries include Saudi Arabia, Kuwait, the UAE, Qatar, Oman, and Bahrain, with a collective deficit of 13% of GDP.

Investor Considerations

Investors may want to limit their exposure to Middle Eastern equities until crude oil prices begin to stabilize over the next couple of years.

If OPEC’s strategy pays off and shale production slows, investors may want to reconsider investing in these regions given the potential for a rebound. The rebound could be especially pronounced if the global economy successfully recovers and demand for crude oil and natural gas rises at the same time that supply is slowing. If OPEC’s strategy backfires and prices remain low, these countries could experience a prolonged downturn.

Key Takeaway Points

  • Crude oil prices have dramatically fallen from over $100 per barrel in 2014 to less than $45 per barrel in 2015, which has put significant pressure on Middle Eastern countries that rely on these exports to finance their budgets.
  • OPEC surprised the financial markets by deciding to keep production levels steady rather than lowering them to support oil prices. If the move succeeds, the cartel hopes to push shale producers out of the market.
  • Investors may want to steer clear of these markets until energy prices stabilize and then reevaluate how the countries’ strategy has paid off.