Gulf stock markets fell on Tuesday, and the Saudi riyal dropped in the forwards market after US crude oil futures collapsed below $0 on a coronavirus-induced supply glut.
The Saudi stock index dropped 1.5 percent at market open with oil company Aramco down 1.7 percent, and shares in the Dubai market fell 1.4 percent, while the Abu Dhabi index lost 0.5 percent and the Kuwaiti premier index declined 2 percent.
The cost of insuring against a potential debt default of Saudi Arabia – the world’s biggest oil exporter – increased slightly to 168 basis points from 166 on Monday, according to data from IHS Markit.
US crude oil futures fell below $0 on Monday for the first time in history as demand cratered. Brent crude, the international benchmark, also slumped below $20 a barrel for the first time in 18 years.
Lower oil prices, combined with other economic pressures caused by the coronavirus outbreak, are hurting the budgets of Gulf countries that rely heavily on crude exports, and have strained their currencies.
All the Gulf states depend on oil income for most of their public revenues.
The International Monetary Fund last week projected the six Gulf states along with oil exporters in the Middle East and North Africa will lose more about $230bn in oil revenues after oil prices dropped by more than 60 percent this year.
The global lender also forecast that economies of the Gulf states will shrink by 2.7 percent, their worst performance in several decades.
Low and very volatile
The oil price will stay low for some time as supply exceeds demand and the current situation on global oil markets is reminiscent of the 1980s oil glut, former BP boss John Browne said on Tuesday.
Browne, who ran BP from 1995 to 2007, said the negative prices were a US issue because of a lack of storage, though he said across the world demand was down while production was still high.
“The prices will be very low, and I think they will remain low and very volatile for some considerable time,” Browne told the BBC. “There is still a lot of oil being produced that is going into storage and not being used.
“This is very reminiscent of a time in the mid-1980s when exactly the same situation happened – too much supply, too little demand and prices of oil stayed low for 17 years.”
The 1980s glut – when oil prices tumbled in the mid-1980s – ultimately led to geopolitical tremors across the world: The Soviet Union collapsed in 1991 while Algeria faced a political crisis that spawned a deadly civil war.
Browne said the demand for hydrocarbons would likely fall, partly as a result of a greater awareness of climate change.
“Demand for hydrocarbons will continue to be weak,” he said. “And that demand will be filled primarily by those who have no choice but to produce oil – so the state oil companies of the world.”
US President Donald Trump said his administration would look at a proposal to block Saudi Arabian oil shipments to the US to help buoy the US shale oil industry against an unprecedented rout that threatens its survival.
“Well, I’ll look at it,” Trump told reporters at a daily news conference after he was asked about requests by some Republican legislators to block the shipments under his executive authority.