Why gulf workers' plight is far from over

Indian workers in Saudi Arabia are already feeling the impact of low crude oil prices over the past few years. Unable to balance its budget on account of low crude oil prices Saudi Arabia decided to cut down on projects resulting in lay-offs of workers, most of them from the Indian sub-continent. Indian government is now planning to evacuate these workers.

Given the current dynamics in the oil market, it is unlikely that these workers will be returning anytime soon. Oil prices in US pierced the $40 per barrel mark, igniting fears of early February 2016 when it crashed below $27 a barrel causing widespread selling in all asset classes.

Headwinds are building up for pushing oil prices lower. The first such sign was visible when Reuters published a survey which found oil production by OPEC nations at an all-time high level. While Saudi Arabia kept on pumping oil at record levels, Iraq and Nigeria also added more to the pool. Iran on the other hand is steadily lifting production towards its target of 4 million barrels a day, with a 25 per cent increase in volumes this year.

On the other hand there has been a slowdown in oil consumption as ISIS related travel warning to Europe impacted international traffic and has resulted in piling up of inventory. This has resulted in inventories of product as well as crude oil piling up to record levels.

To make matters worse for crude oil, refiners in the US will be going in for their annual shut down, which can put pressure as oil demand reduces further.

Supply side pressure is not only from the OPEC nations but from the largest non-OPEC player Russia too as the country has increased output for the third straight month as talks with OPEC to control output failed.

USA too has seen its share of supply pressure, though the country has seen production levels dropping by 1 million tonne per day over the year as shale wells stopped producing given the sharp drop in prices. But this trend has now changed as oil prices bounced back from February 2016 and touched $50 levels in June. Oilfield services provider Baker Hughes said that the number of rigs in the USA increase for the fifth straight week and the eighth in the last nine weeks to 374. Oil rigs pumping oil at the peak of shale oil boom was 1,291 rigs and the low was 316. US oil drillers added 44 rigs in July the most since April 2014.

To add to the problem, one of the biggest buyers of oil, China is slowing down its purchases as the country is reaching its limit of crude storage. The country was building up its inventory of strategic oil storage.

Another sign of bearishness is the lack of floating storage oil tankers for storage as they are filled to the brim with few takers. To top it all a stronger dollar has added pressure to oil as dollar denominated crude becomes costlier to hold.

The reasons which led oil prices to rally from their lows to over $50 a barrel in June have all fizzled out. Oil prices had bounced back on account of supply disruptions around the world, including a major outage in Canada due to forest fires and terrorist attacks in Nigeria. But now Canada is back, Nigeria has increased production and Libya is claiming that it can add another 0.6 million barrels a day as it expects to restart its ports.

In the present over supply situation, Saudi Arabia has moved fast to save its market share by offering its biggest discount to Asian consumers in 10 months for its crude, around $1.1 below the Asian benchmark.

Oil producing countries are struggling to meet their budget deficits. There are only three ways for these countries to do so, one is when oil prices increase their revenue goes up, this option is no longer in their hand as is clearly witnessed from the failure of OPEC nation’s say on global oil prices.

Second is if oil prices are lower, they pump more oil to increase their revenue. This is the option that most of the oil producing nations is adopting. And the third is by cutting down spending. Since most of the gulf countries offer socialist measures to keep their citizen under control, the only way a meaningful spending cut can be enforced is by holding back on development projects.

With oil dynamics tilting on the side of suppliers, it is unlike that the price scenario will improve anytime soon. Though the impact on workers in gulf will be severe and unfortunate, one will have to wait and see the impact it has on global market, the way they did in February 2016.