Dubai: UAE investors were unimpressed by a landmark OPEC agreement inked to steady oil prices and stop their decline in the face of virus-led economic lockdowns. And analysts didn’t think it was enough either.
Dubai Financial Market (DFM) index was down 1.1 per cent at 1,885 points, while Abu Dhabi Securities Exchange (ADX) fell 1.6 per cent to 4,135 points. This puts an end to two straight days of gains by both indices.
“The scale of the cuts, while impressive as OPEC’s largest ever, likely won’t be enough to offset the complete collapse in oil demand taking place in major economies,” cautioned Edward Bell, commodity analyst at Emirates NBD.
Analysts were of the view that while such drastic steps may just be enough to help prevent prices from falling any further, this would barely help rates regain lost ground.
Cuts don’t cut deep
After much debate, the group of 20 petroleum-producing nations agreed to massive production cuts to try and bring stability in prices, which pummeled 50 per cent in March alone. The cuts are the largest OPEC has ever agreed to.
Although the cuts will help offset some of the enormous oversupply in oil markets, the scale of decline in prices is likely to be far larger than the cuts agreed, Bell said. “The deal should help to prevent prices from excessive downside... but probably won’t be enough to help boost prices much higher.”
Low oil prices are generally good for the world economy, but disruptions to the energy industry and to countries that depend on selling petroleum have unnerved investors. Oil prices, which rose as much as 8 per cent on Monday in the wake of the deal, were largely unchanged at 0900 GMT.
“Double-blow” for GCC states
“There is an even bigger double-blow for GCC oil producers, as the impact of lower oil prices on government revenues will be compounded by lower production volumes,” Bell added. “Saudi Arabia, the UAE, Kuwait and Oman will likely see headline GDP contract this year on the back of the oil production cuts.
“Lower GDP estimates for this year will also result in bigger budget deficit metrics across the GCC, where these have already widened in absolute terms on the back of lower oil revenues.”
Apart from UAE benchmarks, other indices in oil-dependent Gulf Arab states too were overstretched. Saudi Arabia’s Tadawul dipped 0.2 per cent, Bahrain’s bourse edged down 0.8 per cent and Qatar’s main index was flat.
Prices to stay where they are
Analysts now expect oil prices, which soared above $100 a barrel only six years ago, to remain below $40 for the foreseeable future.
As per the deal production will be cut by 9.7 million barrels-a-day for the first two months, then by 7.7m b/d from July to December, and then 5.8m b/d for the remainder of the deal. Before the coronavirus crisis, 100 million barrels of oil each day fueled global commerce, but demand is now down about 35 per cent.
Dismay was conveyed by investors in other global markets as well. In Asia, major markets in Japan and elsewhere were down at least 1 per cent and futures markets predicted Wall Street would open lower as well.
