Guest post: the Gulf nations must take advantage of low oil prices | beyondbrics

Guest post: the Gulf nations must take advantage of low oil prices | beyondbrics:



"With oil trading at $50 a barrel, the immediate prognosis for Gulf nations looks grim. However, the future may not be as bad as it first appears. There are several changes that could be made to enable these nations to emerge in a stronger, more stable position than before.



First, oil looks stretched, with Brent for sale a year from now at 19 per cent above the spot price and likely to bounce.



This price differential is unsustainable in a time of almost-zero developed market sovereign yields as it guarantees double-digit returns for anyone who has easy access to storage. Oddly, this may provide a near-term overhang as inventories – usually a sign of oversupply and one way it is calculated “real-time” – rise as a result. Consensus for year-end is $80 and, while the consensus has a history of being very, very wrong, it is in line with stabilising long-dated oil prices, which should theoretically approximate to the marginal cost of production. Indeed, future supply should become increasingly constrained as capex is cut and, while there is elasticity in oil demand, it is typically delayed as consumers do not have significant storage ability to eliminate spot imbalances. Many oil-producing assets are now trading at distressed levels. Given their long-term horizon, it may even make sense to start snapping these up."



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