Oil prices ‘reached bottom’ at $30, expected to average $40 in 2016

Oil prices hit their bottom at just below $30 and could average $40 in 2016, according to Egyptian investment bank EFG Hermes.

The price of Brent crude is hovering around $39 today with West Texas Intermediate slightly below at just over $36.

“Oil prices have reached the bottom already at $30 or slightly below $30, today we have Brent prices over $35 and I think from a supply perspective the oil prices cannot go below these levels for a longer period,” said the bank’s head of research Ahmed Shams El Din.

“The upside that we see for oil is to average $40 in 2016 and we have the assumption that oil prices long-term will remain between $50 and $60. This is not bad for the GCC economies given the end of the last commodity cycle.”

However, El Din added the outlook was still not good for the Gulf oil exporters due to significant pressures on government coffers and external balances.

Saudi Arabia is expected to post a budget deficit of between $90bn and $100bn this year and has seen its foreign reserves fall from $750bn to $600bn, according to the bank.

“It’s obvious the Saudis cannot keep going within the same model,” El Din said, adding more economic reforms would be needed in the region following subsidy reductions.

“It has to be gradual because a lot of these steps are always politically sensitive but I think the UAE has been the first or leading agent in the region to do this followed by Saudi Arabia.”

Outside of oil and gas and government coffers, El Din said decreasing government spending was creating opportunities in healthcare, particularly in Saudi Arabia.

But in contrast, he said the building materials sector was being impacted by lower construction activity and increased costs due to the reduction in subsidies for petroleum and electricity subsidies across the region.