The Gulf’s Great Oil Slump

Oil prices began their freefall in December, dropping below the $60 mark, continuing a bearish run that began in the second half of this year. Prices have almost halved compared to the $115 per barrel that they stood at in June.

The reasons are two-fold, according to experts: increasing supply in the market, primarily due to the growing shale oil production in the US; and decreasing demand, particularly from Asia.

Oil-exporting countries, especially those in the GCC, have, predictably, been adversely affected. With the hydrocarbon sector representing over 50 per cent of GDP and 80-90 per cent of government revenues, the impact has been palpable.

“With GCC economies heavily dependent on hydrocarbon revenues, they are in no position to influence or control the prices as in the past,” said M.R Raghu, senior vice president, Research at Kuwait Financial house (Markaz).

“Oil price is no longer a simple function of demand and supply. A host of other factors including geopolitics play a part.”

Oil ministers across the GCC have asserted that the market will correct itself, and that they have adequate buffers to support their economies. However, stock markets in the region disagree.

BEAR RUN

GCC stock markets wiped out all their year-to-date gains in just two weeks following the annual meeting of the Organization of the Petroleum Exporting Countries (OPEC) on November 27, when the group decided not to cut output.

Dubai’s stock market – one of the best performers globally in 2013, plunged heavily in December and was down around 30 per cent from its May 2014 peak (at the time of publishing). Bourses in Saudi and Qatar also remain highly volatile, with petrochemical stocks in particular witnessing substantial drops.

“As such, for the time being, GCC stock markets will continue to be subject to oil price volatility,” said Amr Hussein Elalfy, managing director at Mubasher Financial Services.

According to Elalfy, the performance of regional bourses in 2015 will not only depend on what level oil prices will find a floor, but how soon that floor will be reached.

“Some economists are now expecting oil price will fall to $50 in H1 2015 before recovering again in H2 2015 to maybe $80- 90 a barrel. Thus, it depends on how sticky low oil prices will be,” explained Elalfy.

“If sustainable, GCC markets will probably suffer further as companies start feeling the pinch of slower economic growth and undergo a round of estimates downgrades, which could trigger a downward spiral in stock prices.”

If oil prices were to continue falling in 2015, there would be an increase in negative sentiment in the markets, more curtailing of government spending, and corporate earnings may be affected, agreed Raghu.

Elalfy also stressed that a sustained decline in oil prices could eventually result in weaker earnings growth for companies across the board.

“If GCC governments cut spending significantly, banks could see their earnings growth and asset quality pressured,” he said.

“Weak stock markets could also trigger a deleveraging wave that can spill over to real estate as individual investors exit to cover their margin loans.”

CUSHIONED ECONOMY

Despite the negative possibilities, experts have emphasised that the outlook for the GCC economies is mostly positive, thanks to vast reserves from fiscal and external surpluses over the past few years.

Harald Finger, the IMF’s head of mission for the UAE, told a conference in Dubai that most of the GCC countries have quite significant buffers in the form of foreign assets in sovereign wealth funds or central banks.

According to Raghu, while Gulf economies haven’t diversified away from oil, their efforts towards that goal in the recent decade will help going forward.

“If the price stabilises in the $55-65 range, in the short and medium terms, GCC countries may have to modify their budgets, and focus only on necessary spending. If the low price persists over a longer term, the impact may be more severe,” he added.