Omicron and the Gulf: The hit to oil is fiscally manageable, as are health risks
The emergence of yet another worrying Covid variant has raised concerns in the Gulf, as it has globally. No cases have been identified in the region yet, but its international connectivity, including as a hub for travel from Africa, does present vulnerabilities, as has been the case for previous waves of the pandemic. At the same time, the region is also better prepared than almost anywhere else to mitigate those risks.
Economically, the predominant concern is, as always, the impact on oil demand. By coincidence, the variant emerged in the run-up to what was already set to be the most contentious and uncertain meeting of OPEC+ since July. It significantly increases the chances of a pause to the 400k b/d taper in January. However, lower production and prices should be manageable fiscally given significant improvements in breakeven oil prices and fiscal reforms across the region.
It is too early to make a sensible assessment of what the demand impact from Omicron and the supply response from OPEC could mean for oil prices in 2022, beyond the short-term market signals. However, from a fiscal perspective, we are not yet too worried because most Gulf states have breakeven oil prices at or below $70 in 2022.
From a health perspective, the Gulf states are well prepared, with some of the highest vaccination rates in the world even if, as feared, the vaccine proves less effective against Omicron, and systems are in place to quickly roll out updated vaccines if required.
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