Sometimes it’s tough to decide whether what’s happened as an event or developed as a trend is a good or bad thing overall.
Certainly, the evolution of oil prices in recent weeks can be viewed as belonging to that category, as the needs of the global economy over time may be set against the uncertainty imparted on trading.
As a battle for market share seems to have been launched among producers, the issue is moot whether it is a cyclical movement or a structural shift which has been encountered and will predominate.
On the one hand, sustained falling prices themselves will impact supply and demand sufficiently to create the conditions for rising prices again, such is the power of the unfettered market.
On the other, if the geopolitical pressures convulsing parts of the Middle East do not impede production volumes, then the rumbling intervention of US shale may have introduced a shockwave whose reverberations last.
From this region’s viewpoint, a clear threat rests in the dramatic effect on the revenues mostly responsible for sponsoring local economic momentum, although observers have been quick to note the buffer of accumulated reserves that will absorb the blow.
Economic consultancy Capital Economics sees “little reason to panic …as we don’t think [it] changes the big picture”, which is that the GCC countries collectively are in a strong position to withstand diminished incomes for some time.
While budget deficits will result, they can be financed easily by turning to debt issuance or drawing upon savings, neither of which exhibit the kinds of perilous numbers prevailing in much of the rest of the world.
Meanwhile, the external finances are firmer still than the internal, and the surpluses hitherto generated in the balance of payments would take longer to erode, and even then the reserves of foreign exchange would absorb the hit.
Says the research firm, “we estimate that the region currently holds around $2.75trn in foreign assets, equivalent to 165% of GDP”.
In that light, Middle East economist Jason Tuvey says economic growth is unlikely to collapse, policymakers won’t have to tighten the purse-strings too much, and the combined restraints implied to surging overseas output and government largesse at home will bring benefits later which should offset the immediate costs.
Concurring with the essence of that main theme, Emirates NBD nevertheless made qualifying remarks in a recent memo.
Firstly, although state spending may not reflect the downturn of receipts so much, nevertheless private sector sentiment will be knocked, so Gulf economies are liable to face “a headwind” next year if current conditions stay the same.
Secondly, the picture is not uniform, some countries being more vulnerable than others to the decimation of finances. Notably, Bahrain and Oman have higher breakeven levels in oil prices relative to budget outlays, the hydrocarbon sector representing less than 25 per cent of GDP in the former case, but nearly 45 per cent in the latter.
The other arena bound to attract attention in these circumstances is regional stocks, whose susceptibility to oil prices (at least sharp swings thereof) has been demonstrated once again.
Bank Audi reported a 2.8 per cent decline in the Pan Arab Composite index in the week following Opec’s decision, led by a 3.9 per cent reversal in Saudi Arabia’s Tadawul. Regional bonds, though, were lifted by the implications of lower oil prices for global inflation, aiding the benchmark series in the US and Europe. Gulf stocks in recent days have essentially marked time while the dust has settled.
For Kuwaiti investment company Global Investment House, the long-term outlook “remains intact”, the attendant economic story “upbeat”. While markets may remain subdued until the new year, value opportunities are liable to emerge against a background of improving corporate data, given the ground already lost recently in share prices.
Reuters has already cited Middle East fund managers expecting to return in the coming months once matters have calmed, considering that the recent past told us that three-quarters results showed a year-on-year 13 per cent increase in earnings in the GCC.
As for the future, Global quotes the International Energy Agency’s prediction of the world’s oil requirement being 104mbpd by 2040, from the present 90mpbd, whereas “current prices do not support the development of these resources”.
All that said, the scene has been set for deeper analysis of the consequence of the hiatus now. In the meantime, the clock is ticking, and we will discover whether the slump dominating the short term turns into quite a different scenario in the medium term.
As Emirates NBD has noted, Opec’s member countries actually reduced output in November (by 424,000 barrels per day, according to Bloomberg estimates, compared to a total quota of 30mbpd and an actual measured figure for the month of 30.56mbpd). As ever, the seeds of the next stage in the market are already sown.
