The Middle East oil exporters are grappling with depressed demand in their key market, China, due to the coronavirus outbreak.
The economies of the Arab Gulf countries are feeling the double sting of a sizeable loss of oil demand in Asia and a plunge in oil prices as the markets fear a significant slowdown in global economic growth because of the outbreak.
If that wasn’t bad enough for the biggest economies in the Gulf, business activity in the non-oil sector continues to deteriorate in OPEC’s biggest producer Saudi Arabia and in OPEC’s third-largest producer, the United Arab Emirates (UAE).
The start to 2020 hasn’t been good for the Saudi and UAE economies as they cut oil production in the new round of OPEC+ cuts, and they cut more than they are expected to, as they are trying to lead by example in the OPEC+ group’s efforts to draw down oil oversupply.
But then China began reporting cases of coronavirus at the end of January, sending oil prices tumbling to more than a year-low last week. Saudi Arabia and the UAE are not only exporting much-lower-than-typical volumes of crude oil, but they are also getting less money for it.
The coronavirus outbreak added more pain to the Gulf economies—it slammed China’s factory output, delayed supplies to export destinations, and depressed business sentiment worldwide. In this way, even the non-oil sectors of the largest oil producers in the Gulf suffered. The ‘diversification’ of economies away from oil didn’t spare the Saudi and UAE economies in February.
In Saudi Arabia, factory output, new orders, and employment trends all lost momentum since the start of 2020, IHS Markit said in its Purchasing Managers’ Index (PMI) survey this week.
The overall expansion of non-oil private sector business activity in February was the weakest on record since the survey began in August 2009, IHS Markit said.
The Saudi Arabia PMI was at its lowest level since April 2018, growth in factory output and in new orders sharply slowed down, and business confidence was at its most pessimistic in a year and a half, with concerns about China and the coronavirus outbreak, according to the survey.
The deterioration in Saudi Arabia’s non-oil sector comes after a strong 2019 performance of the non-oil sector, whose 3.3.-percent growth—the highest in five years—helped the Saudi economy to grow by 0.3 percent last year, despite a 3.6-percent drop in the oil sector.
Prospects for this year were brighter two months ago, when the IMF expected the Saudi economy to grow by 1.9 percent, although it was a downward revision from a previous forecast because of the OPEC+ cuts.
After the coronavirus outbreak, Goldman Sachs slashed its forecast for Saudi economic growth in 2020 to 0.6 percent from 2.1 percent, Bloomberg reports.
In the UAE, the IHS Markit PMI survey showed further deterioration in the business conditions in the non-oil sector, with output contracting for the first time in ten years.
“Supplier performance was meanwhile hit by the coronavirus outbreak in China, with PMI surveys globally noting significant delays to freight deliveries, as well as weaker export demand. With many UAE firms also suffering from credit issues, backlogs rose for the fifth month running,” David Owen, Economist at IHS Markit, said, commenting on the survey results.
The deterioration of the non-oil sector activity in the UAE and in Saudi Arabia, where the non-oil sector rescued the economy from contracting in 2019, doesn’t bode well for the two major Middle Eastern oil producers this year.
They desperately need higher oil prices because the coronavirus outbreak is battering their non-oil economic activity, on top of slamming global oil demand growth and making their key export item and major budget revenue generator—crude oil—cheaper.
It won’t come as any surprise then that the UAE and Saudi Arabia could be the most motivated OPEC+ producers pushing for cutting the group’s collective oil production as much as possible when the partners meet in Vienna later this week.
By Tsvetana Paraskova for Oilprice.com
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