On Sunday, we saw a Gulf market meltdown [11] with stocks falling 7% in Saudi Arabia and 5% or more in the United Arab Emirates and Qatar. The steep declines came on the heels of Friday’s horrific selloff in US markets and presaged the carnage that would begin to unfold hours later when Asian bourses opened for trading for the week.
As Brent continued to slide, the selloff in Mid-East markets continued unabated on Monday with Saudi Arabia’s Tadawul All Share Index dipping more than 6%, hitting levels last seen in May of 2013.
Brent:
Saudi Arabia:
UAE:
Qatar:
"Oil just can’t stop sliding and local investors are very worried about where the bottom is and how long regional economies can take the battering," one asset manager in Abu Dhabi told Bloomberg [12], who reminds us that “Middle Eastern stocks had their worst day of the year on Sunday after Saudi Arabia’s index of equities sank more than 20 percent from a peak in April.”
And more [12]:
In Dubai, stocks declined 1.4 percent to 3,401.62 after plunging as much as 6.1 percent.
The gauge could fall below 3,000, "and if that happens, it will be a severe jolt," Nabil Rantisi, the managing director of brokerage at Mena Corp. Financial Services, which has a client deposit base of 6.8 billion dirhams ($1.85 billion), said by phone from Dubai. “It’s a scary scenario.”
Yes, scary indeed. And as WSJ alluded to on Sunday when, just hours after we reminded the world that this latest bout of carnage across global markets all started with the demise of the petrodollar, it noted that "petrodollar-dependent Persian Gulf [states] depend on energy exports to finance their expansionary spending plans at home, the weak outlook for oil further aggravated a recent sell-down of risk in the region."
Put simply, if oil prices stay low - and they likely will, as revenue maximization for the Saudis still looks to be outweighed by the desire to wrench every last bit of market share away from US shale drillers by bankrupting the entire space - the region’s fiscal situation will only deteriorate, triggering further pressure on petrodollar reserves, making the pegs in Saudi Arabia and the UAE increasingly unsustainable, and ultimately forcing the Saudis into the debt market to mitigate the FX reserve drawdown.
All of this will have an adverse impact on credit worthiness (see Fitch’s move to cut its outlook for the kingdom) which could trigger further flows out of the country and so on and so forth in a very non-virtuous circle, just months after Saudi Arabia’s historic move to open its stock market [13] to foreign investment.
And as the pressure mounts on asset prices so too will the pressure mount for fiscal retrenchment and you can believe that reining in the quality of living in these states will come at a tremendous social and political cost.
Perhaps Al Masah Capital said it best [14]: "regional buyers need a lot of conviction to step in front of this speeding train [especially] in context of a rapidly changing economic environment."
Summed up in one picture: "Arab Traders With Hands On Their Faces"
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Bonus: Color from Bloomberg on the Saudis and crude
- Current situation reminiscent to step-change in Saudi policy in 1985 when it abandoned fixed selling prices, swing producer role, boosting output to 6.2m b/d by Aug. 1986 from 2.17m a year earlier
- OPEC Basket consequently fell to <$10/bbl from ~$27, briefly spiked to almost $40 after Iraq’s 1990 invasion of Kuwait before drifting around $20 for next 10 yrs
- Saudi no longer ruled by succession of octogenarian kings; new, younger leaders are seeking to secure oil-mkt share for decades to come: Lee
- They recognize that cutting output to bolster prices will boost non-OPEC production, reducing OPEC mkt share
- Primary concern of royal family is long-term well-being of citizens, not short-term comfort of other OPEC countries
- Kingdom probably feels less responsible for other OPEC members after they failed to support its call for quota increase in 2011
- Saudi Arabia eventually relented; in 1998 coordinated unprecedented global output cut involving OPEC, non-OPEC nations via accords in Riyadh, Amsterdam and The Hague
- While current mkt environment is starting to feel more like 1998, no sign emerging of OPEC/non-OPEC coalition to manage mkt this time around
- Some OPEC members are calling for emergency meeting yet are unwilling to reduce their own production, reducing effectiveness of their pressure on Saudi
- W/out cuts, lower prices will probably remain until non-OPEC output growth falters through canceling of big, long-term projects that could take yrs, not months
- Dec. 4 OPEC meeting will give clearer picture of pressures on Saudi, its ability to withstand them
