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Oil prices have fallen to their lowest levels in several months amid concerns about a drop in demand due to the worsening global financial situation. A disappointing U.S. monthly employment report, poor news on Chinese economy, depressed purchasing manager surveys in India and more weak data in Europe all contributed in sending demand to steeply lower.

 

Brent North Sea crude cut below the $100 level, plunging $3.44 to reach $98.43 a barrel, the contract’s lowest level in 16 months.  New York’s main contract, West Texas Intermediate crude for July, dived $3.30.

 

Brent oil prices had already slumped by 15 per cent during May, while WTI collapsed by almost 18 per cent, as concerns mounted over the state of the faltering world economy.

 

Citigroup Global Markets cut its prediction for 2013 oil predictions to $99 a barrel as a result of expected global weakening in demand.

 

May 30, 2012

 

 

Analysis and Forecast: Increasing Risk


 

Gulf states largely depend on income from oil and gas exports for their revenues.

 

Efforts to diversify the local economies have had mixed successes in the different states. Much of those efforts rely on oil income.

 

The breakeven oil price for balanced budgets has continually been rising over recent years for a number of reasons, including increased expenditure, particularly since 2007. The global economic slowdown and the impact of the Arab Spring have resulted in a drop in non-oil revenue, making oil income even more important. Oil prices below the breakeven price for those nations stifle the ability of their governments to continue with ambitious development plans, and therefore pose a greater economic risk. Predictions for average oil prices for 2013 are below the breakeven price for the UAE and Bahrain.

 

The downward pressure resulting from the worsening global economy seems to have been greater than the upward pressure on oil prices resulting from the situation on the Iranian nuclear issue.

 

The figure below shows the approximate break-even price of oil for GCC states (estimate from Emirates NBD Bank 2012; other Political Capital estimates):