Bear sentiment for Gulf markets if US crude dips below $40

Dubai: Local equity markets in the Gulf are likely to come under pressure if US crude pushes below $40 a barrel in the coming days, according to Gary Dugan, Chief Investment Officer of the National Bank of Abu Dhabi (NBAD).

US crude West Texas Intermediate (WTI) fell towards $40 a barrel on Thursday reaching a low of $40.21 at 1:40pm local time.

“It’s a bit of a worry. If we look at some of the local equity markets they have sat at key supports and given oil price, certainly if West Texas in the next couple of days goes below $40 a barrel, you can see the equity markets follow it down,” Dugan told Gulf News by phone.

The region’s biggest exchanges, the Dubai Financial Market and Saudi Arabia’s Tadawal, fell by more than 5 per cent this week under pressure from weak oil prices and a jittery Chinese economy.

Oil, a major revenue source for the Gulf economies, has failed to recover its losses of about 60 per cent over the past 12 months from when global benchmark Brent crude sold for $115 a barrel in June 2014. On Thursday, Brent touched trading day low of $46.35 a barrel at 1:30pm local time.

“In the very near term the out look is very negative for prices,” Edward Bell, Commodities Analyst, Global Markets & Treasury at Emirates NBD, told Gulf News by phone.

Oil prices are expected to continue to face pressure until the end of September due to weak global growth outlooks and an aversion by traders to risky equities. But while a below $40 price for US crude will bring down local markets in the near term, once markets settle lower prices may attract foreign investors.

“We’re just hoping we can have that kind of capitulation then we can start perhaps more encourage investors back into the market because at the moment there is just too much risk to the downside and markets just aren’t cheap enough to buy yet,” Dugan said.

In the short-term, Gulf economies will continue to draw down on cash reserves amid low oil to maintain government spending.

“Overall it’s more of the bare sentiment or the softening we’ve had the whole year, which means there is going to be pressure on fiscal balances,” Bell said.