Volatility in oil prices to continue

Abu Dhabi: Volatility in oil prices will continue in 2015 and any significant upside from current levels is unlikely until late 2015 or early 2016, an Abu Dhabi-based analyst said.

Sachin Mohindra, a GCC (Gulf Cooperation Council) equities portfolio manager at Invest AD, also predicted less impact on the GCC countries — with the exception of Bahrain and Oman — due to the plunge in oil prices over the last eight months.

“Our view is that oil prices will remain volatile. We also feel that the pace and intensity of the recent rally is not justified by fundamentals. We could see some price correction in the next few months and a recovery later in the year,” Mohindra said.

Oil prices have dropped drastically due to oversupply caused by a record Shale production in the US and weak demand from China and the Europe.

Mohindra said Saudi Arabia and the UAE hold massive financial reserves to overcome any difficulties caused by the fall in revenues due to lower oil prices.

“Saudi holds through the central bank and the UAE holds reserves through multiple sovereign wealth funds. In times of need, some of these financial reserves can easily finance deficits.”

“A country like Saudi has little public debt. So the government has not really borrowed. You can also borrow at attractive rates to fund your deficit. Similarly Abu Dhabi government borrowing is relatively muted. The governments have an option to borrow. “

He did not foresee any cuts at the government level in Abu Dhabi due to the present situation.

“Most of the major expenditure which was announced five years ago is being implemented now. Some rationalisation on projects that are yet to be announced might happen due to prolonged low oil prices. We might see rationalisation of subsidies and other things. It is too early to worry about capital spending.”

Impact on capital spending if it happens will only be seen in 2016, he said.

“If oil prices remain weak for a prolonged period of time in 2016 and 2017, we might see some cuts in capital spending. Banks have enough liquidity and they can easily spend on these projects. There are no signs of liquidity being withdrawn.”

“If you compare to what happened in 2008 and 2009, there was a liquidity crunch. As of now we don’t see any signs of that happening. It might happen later in the year if oil prices remain very weak.”

Oman could face challenging times if oil prices will remain low for a long time.

“The challenge for Oman is to expedite the non-oil side of the economy. Bahrain too is less resilient. They need to diversify their economies.”

On Iran oil entering the market if sanctions are lifted, he said the country needs many years of investment to optimally utilise their production capacity.

“Because of years of sanctions there has been significant under investment in technology and a lot of their production capacity is not efficient now. In order to ramp up production they need to invest a lot. I don’t think too much incremental supply will come from Iran in the short term even if the sanctions are lifted, but in the longer term, it is definitely a risk.”

Brent retreated by over four per cent last week amid concerns that Iranian oil could enter the market if sanctions are lifted as the country holds discussions with six major western powers over its controversial nuclear programme. Iran has said it believes that oil prices will not exceed $60 per barrel until 2016.