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US oil exports likely to drag down prices

Dubai: The US government has authorised limited crude oil exports to Europe, for the first time in years raising concerns that the oil prices could decline further, affecting budget balances of many oil exporting countries including the Gulf countries.

The US Department of Commerce has granted two licences to export US crude to the UK since last year and another two to Italy, according to data Reuters obtained through a Freedom of Information Act request.

One application for German exports was filed in January and is awaiting a decision by the Bureau of Industry and Security (BIS), which is responsible for reviewing requests to export crude under a 1975 law that bans most shipments with a few exceptions, including sales to Canada and re-export of foreign oil.

“Oil prices have been under pressure on account of depressed demand and surge in supply from new sources. If the US is entering the market with new supplies it is not going to bode well for Middle East oil exporters,” Saadallah Al Fathi, former head of the Energy Studies Department at the Opec Secretariat in Vienna, said.

The new licences could add to expectations that the Obama administration will allow companies to use provisions in the existing regulation to slowly increase exports, while stalling on a decision on whether to scrap the ban. With US oil production at a 25-year high, many US oil producers are eyeing other markets and have called for an end to the ban on exports, which they consider a relic of the 1970s, when the Arab oil embargo led to steep prices at the pump.

The US is set to overtake Russia this year to become the world’s second largest producer of oil, according to the International Energy Agency (IEA). To date, the US’s reduced appetite for imported oil has been countered by growing demand from emerging markets.

With the emerging economies slowing, however, demand from these markets too is likely to slacken in the short term. With a greater share of exports now being sent to these economies, Middle Eastern oil producers are also exposed to the risk of emerging market slowdown.

“If global oil prices are going to be hit from both supply and demand sides, the only way for oil producers to support price is to control supplies. With new suppliers from Libya and Iraq entering the market along with budgetary compulsions of some of the Gulf economies keeping their output high, it will be difficult option to control supplies,” Al Fathi said.

Expansion in global oil supply, together with US shale production, is likely to push average oil prices below $100 a barrel. According to the IMF estimates, majority of countries in the region now need an oil price in excess of $90 to balance their budgets.

The IMF sees potential fiscal deficits in all oil exporting countries, including some of the Gulf countries from the region except Kuwait and the UAE by 2015 in the absence of a fiscal policy adjustment. Even a smaller decline in oil prices under plausible scenarios of slower growth in emerging markets would have a material effect on oil prices and fiscal balances of GCC oil exporters, the IMF said in its latest regional economic outlook.

The rapid expansion of shale oil production in the US and its impact on the global oil prices are pushing Gulf countries to speed up their economic diversification efforts, according to a regional economic outlook report by ICAEW and Cebr (The Centre for Economics and Business Research).

While shale is just one side of the oil supply story, economists say oil prices are likely to be undermined further by the softening of sanctions against Iran. “While the official removal of sanctions will involve years of political wrangling, efforts to block Iranian access to international markets are likely to become less effective over time. We expect that some Iranian oil will come back on stream by 2017,” Douglas McWilliams, Chief Economist and Executive Chairman of Cebr, said.