ENERGY MACROECONOMICS IN 2016
The energy world is in the midst of fundamental shifts. It is still unclear how Beijing plans to manage China's first major economic wobble in nearly three decades, subsidy cuts in Gulf countries that have long enjoyed oil wealth are still underway and the US has raised interest rates for the first time in a decade. Plus, the Saudi Arabian riyal fell to a record low against the US dollar in the one-year forwards market in mid-January and stateowned Saudi Aramco, the world's largest oil producer, said it is eyeing an initial public offering (IPO) this year. Questions abound over whether the region's economic goliath is falling. Europe is still posting minimal economic growth and the majority of the BRIC economies (Brazil, Russia, India and China) are struggling to find their fiscal feet.
All of these macroeconomic factors feed into what underpins the character of the global economy – confidence. The bearish sentiment means many investors that have typically rushed to funnel cash into oil and gas projects are now tentative, including those in the Middle East. Tightened budgets is one of the reasons behind Royal Dutch Shell's decision to withdraw from a $10 billion development of the Bab sour gas reserves with Abu Dhabi National Oil Company (Adnoc), while Total is reducing its global workforce by 4,000 and the UAE's Sharjah-based Dana Gas is cutting its headquarter's workforce by 40%.
Perhaps confidence in the macroeconomic outlook will improve as the year progresses if China's economy stabilises, the US' plans to increase interest rates becomes clearer and the subsidy cuts in the Gulf help boost coffers.
China’s fiscal transformation
The treasury of the world's largest economy faces a challenging year and energy producers are not immune, but China's outlook is not as bleak as global headlines suggest. The devaluation of China's currency, the yuan, last August fueled fears that China's debt-driven burst onto the global stage over the last decade could crumble and take the bulk of Asia's energy demand down with it. But the Chinese economy is still expected to grow by around 7% in 2016 – albeit the slowest full-year growth since 1990 – and Beijing's doublefreeze on China's small stock market in early January primarily affected sentiment, rather than actual business.
Beijing's plans to start switching to more sophisticated market reforms in 2016 could lead to a safer and consumer-based economy – clarity that will benefit economies worldwide. Energy producers in the Middle East are expected to benefit from China's historical trade links that have endured for over two millennia, as Beijing ramps up its One Road, One Belt programme along the new Silk Road. Trade between the UAE and China is already growing at 16% annually and China is now the UAE's second largest trade partner – volumes stood at $54.8bn in 2014. Beijing's aversion to wade into regional politics will continue to charm trade partners like Oman, the UAE and Iraq and the historic Sino-Iran trade accord will regain momentum following the lifting of sanctions on Iran in January.
Saudi Arabia territory enters uncharted
Budget deficits, subsidy cuts and initial public offerings are not terms usually associated with the Kingdom. Saudi Arabia's oil-centred economy, where petroleum accounts for 80% of its revenues, will spend less this year, rapidly trying