The price of Brent crude oil – an industry benchmark – fell below $28 a barrel for a while on Monday before recovering slightly. The last time it was that low was in 2003.
The oil market is already oversupplied and added to that glut will be millions of barrel of crude from Iran after the lifting of sanctions.
This is sending shock waves through the economies of oil producers like Dubai.
“We haven’t seen oil prices at this level in close to 15 years. Gulf states budgets were dependent on oil prices of $70 [a barrel], that’s the level they need to balance their budgets,” said analyst Nour al Zoubi with World Financial Services in Dubai.
He pointed out that predictions by international banks that the price may fall as low as $10 a barrel, means a grim outlook.
Gulf Arab governments have already cut back spending as their revenues from oil sales fall, but the cheaper it gets the more austerity they have to consider.
Saudi Arabia’s 2016 state budget, for example, was based on an average Brent oil price of about $40, analysts believe. If oil stays at current levels, additional spending cuts could slow economic growth further – conceivably threatening a recession.
Analysts at JPMorgan said oil-producing countries will need to sell large quantities of stocks and bonds this year to cover shortfalls in their budgets resulting from the oil price slump.
They estimate sales of $110 billion worth of bonds this year, up from $45 billion last year, and $75 billion of equities compared with $10 billion.
In a further sign of the pain low prices is inflicting on oil producers, the Organization of the Petroleum Exporting Countries – OPEC – forecast that supply outside the organisation would decline by 660,000 barrels per day (bpd) in 2016, led by the United States. Last month OPEC predicted a drop of 380,000 bpd.
HSBC Chief Executive Stuart Gulliver said the price of oil is likely to settle between $25 and $40 in a year’s time.
“Major producers are currently delivering 2.0 to 2.5 million bpd more than demand, so the question is how long they can continue to overproduce at that level.” he said at the Asia Financial Forum in Hong Kong on Monday.