Lower oil prices could wipe $12B from Turkey’s energy import bill

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Pump jacks operate in front of a drilling rig in an oil field in Midland, Texas, U.S., Aug. 22, 2018. (Reuters Photo)

 Daily Sabah -Having exceeded $40 billion last year, Turkey’s energy import bill is estimated to be slashed by $12 billion and inflation is set to decline by up to 1% in case crude prices average between $35 and $45 this year.

Since this week’s “oil shock” struck global markets hard on Monday, pushing crude oil prices to sink to their lowest level in four years, the annual average price per barrel is expected to come out at around $35-$45. Should this be the case, Turkey’s energy import bill might be slashed by some $12 billion, while also bringing inflation down by as much as 1%.

The standoff between Riyadh and Moscow, both of whom have promised to raise oil output following the collapse in last week’s talks between the Saudi-led Organization of Petroleum Exporting Countries (OPEC) and a Russian-led group of non-OPEC oil-producing countries, is set to extend an output cut to stabilize the coronavirus-hit market.

Soon after, Saudi Arabia, in an aggressive move, said it would slash its official selling prices and ramp up production, triggering an all-out price war. The clash sparked a more than 25% slump in oil prices on Monday, triggering panic selling and heavy losses across global markets.

Coupled with a lull in oil demand in light of the coronavirus, international benchmark Brent saw the value slump as low as $31.27 per barrel on Monday, while American benchmark West Texas Intermediate saw barrels decrease to as little as $27.34.

While both benchmarks marked their lowest levels since Feb. 12, 2016, they also posted more than a 30% decline – the largest single daily percentage loss since January 1991 during the Gulf War.

Brent was trading at about $36 on Tuesday, off this week’s low of about $31 but 45% lower than at the start of the year.The crash has also brought up questions over the course oil prices will take throughout this year, especially for producers and energy-dependent countries.

The failed OPEC+ meeting will result in a production surplus of 2.1 million barrels per day in the global oil market as of April, creating a supply-sided pressure on prices.

The oil market has already been grappling with the spreading coronavirus. The impact has dramatically lowered global demand for oil. Now, pressure appears to be growing on oil prices in terms of both supply and demand.

Due to the decline in crude prices, Turkey’s gasoline prices decreased by TL 0.6 and diesel prices by TL 0.55 from midnight Tuesday onward.

“The decline in gasoline and diesel prices could lower inflation by 0.5 basis points,” Anadolu Agency Finance Analyst Haluk Bürümcekçi said.

“Oil prices averaged $65 per barrel in 2019. If they average $45 a barrel in 2020, which is $20 a barrel lower than the previous year, Turkey’s energy import bill will fall by $12 billion this year compared to 2019 when it was over $40 billion,” he said.

Professor Erhan Aslanoğlu, vice president of Piri Reis University in Istanbul, said the oil price decline would have a positive impact on Turkey’s current account balance and inflation.

“Under the assumption that Turkey’s gross domestic product (GDP) would be 5% this year, the hypothesis is that every $10 a barrel decline in crude prices would shrink the current account deficit by $4 billion. That said, I expect that a $20-per-barrel decline in oil prices would lower the current account deficit by $7 billion-$8 billion,” he explained.

Aslanoğlu added that he estimates inflation in Turkey will decline by 0.5 to 1 basis point in 2020 due to low oil prices.

‘Inflation to drop by 1% if oil stays at $35’

Sefer Şener, a professor at Istanbul University Economics Department, noted that Turkey spent around $17 billion in 2019 for 263 million barrels of oil it imported.

“If we presume that the same amount of oil will be imported in 2020, an average oil price of $35 a barrel this year would mean $8 billion less expenditure on oil imports,” he said. “This will also bring down inflation by approximately 1% if oil prices stay at around $35 per barrel,” he added.

Artem Abramov, head of Shale Research at Norway-based independent energy research and consulting firm Rystad Energy, argued that it is possible to see lower prices for many months.

“There is uncertainty now in the market and the overall sentiment is toward the negative. This means that we might see prices going even lower in the next few days or weeks,” he said.

Abramov said there is still the probability that Saudi Arabia-led OPEC and Russia-spearheaded non-OPEC could meet again in the future to discuss the situation in the global oil market.

Given that Rystad Energy expects Brent crude to average around $30 per barrel until the end of the second quarter, he said the consulting firm expects some new discussions between the OPEC and Russia, which will push Brent over $40-$45 by the end of the year.

“We would expect OPEC to restore some discussion, but it would politically look very weird if they now go back to the discussions immediately,” he explained.

“The most important implication from this price collapse is that the market will lose faith in any kind of future OPEC production agreement because we saw that the alliance that lasted three years end basically in a few hours,” he added.

‘Six- to nine-month impact on U.S. shale’

Since Riyadh and Moscow formed the OPEC+ alliance in December 2016, oil-producing member countries have cut their production levels three times to support crude prices. However, this strategy mainly helped high-cost U.S. shale oil producers, Abramov contended.

“For U.S. shale, overall, it takes around six to nine months before you start seeing some impact of low oil prices. The most immediate impact will be that we won’t see much growth in the second half of the year. Then, in the fourth quarter, we’ll start seeing significant production declines from the U.S.,” he said.

He noted that Russia needs at least $40 per barrel to balance its budget, while its fiscal breakeven is around $40 at the moment, adding that both Russia and Saudi Arabia are comfortable as long as they achieve $45-$50 per barrel.

“But it’s impossible to go much above that because then you trigger too much activity in U.S. shale and too much growth in the market toward oversupply. And, we do have the impact of coronavirus on the global oil demand, and it remains to be seen how it will be,” he added.

Phil Flynn, a senior market analyst from Chicago-based futures brokerage firm Price Futures Group, said there could be bankruptcies in some U.S. oil companies because of high debt and low oil prices.

“We will not see high prices until the final quarter of 2020. When central banks’ new stimulus kicks in to revive economies, then we can see $45-$50 per barrel range once again,” he asserted.

“Oil prices of around $40 will be the new normalcy for the most part of this year,” he added.

Saudi Arabia, which has already announced it would hike supplies to a record 12.3 million barrels per day (bpd) in April, said on Wednesday it would boost production capacity for the first time in more than a decade.

The United Arab Emirates (UAE) followed Saudi Arabia as its national oil company ADNOC said in its announcement that it would raise crude supply to more than 4 million bpd in April and would accelerate plans to boost its capacity to 5 million bpd, a target it previously planned to achieve by 2030.

By raising supplies, Riyadh and Abu Dhabi will add a combined 3.6 million bpd of extra oil in April to a market already awash with crude, compared to their existing output that has been limited by the pact with Russia that expires in March.

In addition, Moscow has said Russian oil firms might boost output by up to 300,000 bpd and possibly as much as 500,000 bpd.

Russian Energy Minister Alexander Novak said on Wednesday raising output was “not the best option” and said Moscow was still open to dialogue with the OPEC.

OPEC member Algeria said intense discussions were underway, and UAE Energy Minister Suhail al-Mazrouei called for a new pact on supplies. But Saudi Arabia said on Tuesday talks were pointless unless they were going to lead to a deal.

State-run Saudi Aramco plans to raise capacity to 13 million bpd from 12 million bpd, Chief Executive Amin Nasser said, adding that the move was ordered by the Energy Ministry.

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