As Opec’s deal passes the six-month mark the message could not be clearer: there was never going to be a quick-fix route back for a historically bloated world oil market.
Investment bank Merrill Lynch is the latest to recognise the flaws that were built into Opec's deal from the start. In lowering its forecast yesterday for world benchmark Brent crude by $2 this year, to $50 per barrel, Francisco Blanch, the bank's lead commodities strategist, pointed out that Opec – and its main external partner in the latest deal, Russia – cranked up output to historically high levels at the end of the year, which inevitably meant their deal would struggle to make progress in the first half of this year.
That also gave time for output from exempt members – Libya and Nigeria – to recover. And the early oil price jolt enticed almost all of the US shale production that had been forced off the market last year to come roaring back. Indeed, Merrill cut US$5 from its US benchmark forecast, expecting WTI crude to average $47 per barrel this year.
In a separate report, Merrill also underlined another fact that is increasingly apparent for oil economies: diversify or suffer.
The bank predicted a “soft landing” for the UAE economy during this oil price crash, just as the IMF and others have, a tribute to the country’s economic diversification efforts, to build a fiscal buffer and to keep credit under control. Unlike a decade ago, when GDP dipped more than 5 per cent in the wake of the financial crisis, Merrill expects non-oil GDP to pick up this year to 2.7 per cent from 2.3 per cent last year, and accelerate to as much as 3.5 per cent in the run into Expo 2020.
Even if the country records small deficits this year and next, the underlying reason will be investment spending, for example on Dubai’s new airport, metro lines, Expo 2020-related ventures and infrastructure projects around the country.
For Gulf states more broadly it is a mixed picture. Regional heavyweight Saudi Arabia has borne the brunt of Opec cuts. The kingdom has shown financial strains in the first quarter, with Saudi Arabia Monetary Agency reporting a decline of $8.4 billion in April’s reserves to $500bn.
The main risk for the kingdom, however, is that such strains may divert it from the ambitious diversification course that Crown Prince Mohammed Bin Salman has set, as Merrill Lynch and others emphasise.