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Khatija Haque - Head of Research & Chief Economist
Published Date: 12 September 2021
The decision by OPEC+ to unwind production cuts from 2020 and Q1 2021 over the coming year, if fully implemented, would imply a significant upside revision to our 2022 oil GDP (and thus headline GDP) growth forecasts across the GCC oil exporting countries. However, given slowing global growth and the continued risks posed by the Delta variant of Covid-19 in the face of uneven global vaccine rollout, we think OPEC+ will need to adjust its production schedule next year in order to prevent an excess supply situation in H2 2022 and any subsequent downward pressure on oil prices.
At the end of July, OPEC+ agreed to raise oil production by 400k b/d every month to unwind their large output cuts from Q2 2020 and also to increase baseline production levels from May 2022. If OPEC+ sticks to its plan to increase oil production by 400k b/d through the end of this year, which is our baseline assumption, this would mean a smaller contraction in the oil & gas sectors in the GCC than our GDP forecasts had assumed.
For the UAE, we now expect oil production to reach 2.9m b/d by December, up from 2.75m b/d at the end of July (Bloomberg data). For 2021 as a whole, we now expect hydrocarbon GDP to contract by -2.0% (-3.5% previously), taking into account increased investment in the sector as well as the recovery in crude oil output. This would bring headline GDP growth to 1.9% in 2021 from our previous forecast of 1.5%. We have not changed our non-oil GDP growth forecast of 3.5% for the UAE this year.
For Saudi Arabia, we expect crude oil production will rise to 10m b/d by the end of this year, from 9.4m b/d at the end of July. We have thus revised up our forecast for oil & gas GDP to -1% in 2021 from -2.5% previously. We have also revised up our non-oil growth forecast for the kingdom to 5.0% from 4.0% previously on the back of a faster than expected rebound in Q2 and stronger than forecast growth in private sector credit and consumer spending so far this year. As a result, we now expect real GDP growth of 2.5% in KSA, up from our previous forecast of 1.3%.
Source: Emirates NBD Research
The outlook for 2022 is a little more uncertain, however. While we believe the market can absorb an extra 400 b/d of oil every month through the end of this year, if this pace of increased output is maintained through 2022, all of the pandemic related cuts would be unwound by the end of Q3. It would also mean double digit growth in crude oil production for the major GCC oil exporters and thus sharply higher headline GDP growth in 2022. However, the oil market balance would return to surplus by H2 2022 in this scenario, based on current demand projections, putting downward pressure on oil prices. The question then is whether OPEC+ will continue to increase production at the current rate if it means accepting a lower oil price.
Budget deficits in the region have narrowed this year, but break-even oil prices for the GCC countries will likely remain above our expectation of USD 65/b in 2022 based on our forecasts for government spending next year, except for the UAE where we estimate a budget breakeven oil price of USD 61/b in 2022. As a result, we expect OPEC+ to curb production growth next year in order to keep the market closer to balance and support oil prices in the USD 60-70/b range.
Our forecasts for oil & gas GDP for next year are still sharply higher than 2021 as shown in the table below, but lower than they would be if OPEC+ stuck to the 400k b/d monthly increase through all of 2022. Based on our more conservative oil production forecasts, we expect headline GDP growth in the region to accelerate to 5.1% in 2022 from an estimated 2.3% this year.
Source: Emirates NBD Research
While we expect non-oil growth in the region to also gain momentum in 2022, this will largely be due to the continuing recovery from the pandemic and increased investment on the back of structural reforms. We expect governments in the region to remain relatively conservative in terms of their budget spending as they continue to prioritise deficit reduction and fiscal reforms.
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