Oil prices rally to two-year high in late September amid rebalancing of supply and demand
The economy of the Middle East and North Africa (MENA) region continued to expand at a moderate pace on diverging trends, with oil-producing countries feeling the effects of OPEC-dictated cuts and oil-importing economies benefiting from resilient domestic demand and improving global dynamics. A second estimate for the region shows that growth was 2.0% in the second quarter, slightly below the 2.2% year-on-year increase initially reported. The downward revision followed more complete data for the region’s individual economies, which saw Saudi Arabia falling further into contractionary territory and Qatar struggling to grow in annual terms.
Saudi Arabia, the region’s heavyweight, entered into recession in the second quarter as crude output cuts continued to weigh on the oil sector and authorities’ fiscal consolidation drive dragged on the non-oil private sector. The country is grappling with tight liquidity in the domestic market and a gaping fiscal deficit despite higher oil prices compared to a year ago, which has prompted authorities to resort to tapping into international bond markets. In late September, Saudi Arabia issued USD 12.5 billion in its third multi-billion dollar bond issue so far this year. Through a royal decree issued on 26 September, the Saudi government announced its intention to allow women to drive next year under certain conditions, a move that signals a renewed push for reform. The move is expected to greatly benefit several sectors in the Saudi economy and lead to higher participation of women in the workforce.
Similarly, the Qatari economy slowed down in the second quarter to its lowest rate since the height of the global financial crisis. The result, which included most of the first month of the economic blockade imposed by several Arab states led by Saudi Arabia, suggests that the trade embargo was not overly crippling for the economy, with growth largely being weighed down by the government’s commitment to OPEC cuts to oil production. In addition, recent trade figures show that the Qatari economy has successfully established alternative trade routes for goods previously sourced from Saudi Arabia and the UAE.
Meanwhile, oil prices were on a tear through most of September as strong global growth sustained demand and efforts to resume operations in the Gulf Coast following Hurricane Harvey added pressure on U.S. crude stockpiles. In addition, the political row that followed an independence referendum in late September in the Iraqi Kurdistan region has also added the potential for supply shocks in the market. Turkish President Recep Tayyip Erdogan threatened to block oil exports from the region, while Iraq called for all foreign countries to stop importing Kurdish crude. These moves threaten around 600,000 barrels per day in output.
