Saudi investors remain optimistic amid oil volatility

While oil prices have won support in recent weeks on a decline in operating US oil rigs and as energy giants cut investment, markets-watchers say volatility is likely to continue for some time.
“The profitability of regional petrochemical producers, which benefit from advantageous feedstock pricing, will continue to be highly correlated to oil prices,’’ NBK Capital said in a recent report.
Petrochemical prices are closely linked to prevailing oil prices because naphtha, a common feedstock, closely tracks the price of crude.
The Saudi stock market’s petrochemical Industries index dropped 1.33 percent to 6,321.39 points on Monday. The index, however, is 7.93 percent higher so far this year.
Market investors have remained optimistic although crude prices lost around 60 percent of their value between June and late January.
The Tadawul All-Share Index has gained 10.81 percent so far this year.
The key index, however, dropped 0.72 percent on Monday to 9,234.32 points.
“Oil will stay around the $60 price range for sometime and its finding a bottom at the $55-$60 level,” said John Sfakianakis, Middle East director at Ashmore Group.
“If this continues, the price of oil could begin to rise above $60 and test new higher levels,” he told Arab News.
According to reports, Benchmark US crude oil fell $1.54 to $49.25 a barrel on the New York Mercantile Exchange on Monday. It fell $1.02 on Friday to $50.81.
Brent North Sea crude for April lost $1.24 to stand at $58.98 in London afternoon deals.
WTI slumped 4.66 percent and Brent tumbled 2.1 percent during the week to last Friday.
Despite oil’s slide, public spending will continue to remain strong in Saudi Arabia and many other Gulf economies given that many have spending commitments over the next few years, said Sfakianakis.
Kuwait has just announced a huge public investment program above $100 billion which is an example of spending commitment, he pointed out.
Spending will continue to remain high as many of these investments are a must not a luxury, said Sfakianakis.
A Bahrain-based analyst, who declined to be named, commented: “I personally do not think that the current price range will last for that much longer. Prices are likely to increase, at least gradually. But the economic and political uncertainties of the day may continue to fuel volatility.”
Oil prices more than halved between June and January, with Brent front-month futures reaching a low of $45.19 a barrel on Jan. 13.

Since then prices have picked up. Brent futures jumped to $63 a barrel last week as traders closed longstanding short positions in reaction to a falling US rig count.
Commenting on the current price levels, Tamer El Zayat, senior economist at the National Commercial Bank, told Arab News: “Oil prices were expected to rebound since the decline was seen as too much too fast, yet the flurry of bad news from Europe and China growth-wise might bring down prices in the near term to below 50.”
He added: “Nevertheless, I expect that things will edge back to $80 a barrel range with the US shale oil industry feeling the heat, as evident from the reduction in rigs over the past couple of weeks and recent news from many companies of significant capital expenditure reductions that ranges in the 30 percent-40 percent as well employee layoffs.”
El Zayat also commented on the a recent statement made by International Energy Agency’s Chief Economist Fatih Birol that the rise of the Islamic State (IS) in Iraq and Syria presents a major challenge for the investment necessary to prevent an oil shortage in the next decade.
“The security problems caused by Daesh (IS) and others are creating a major challenge for the new investments in the Middle East and if those investments are not made today we will not see that badly needed production growth around the 2020s,” Birol said in remarks published in a Reuters report.
“The appetite for investments in the Middle East is close to zero, mainly as a result of the unpredictability of the region,” he said.
Echoing Birol’s views, El Zayat told Arab News: “IS represents a geopolitical threat not only in the near-term, but also over the medium term, especially that the group had been able to withstand the ground and aerial assaults that had been targeting the militant group since early August on multiple fronts, which reflects operational efficiency and tactical awareness.”
He added: “The realities are that such group is still holding more than 250,000 km, carving them from Iraq and Syria. This makes investing in Iraq, in particular, a risky proposition, even though the fighting is far from the south, which house three-quarters of Iraq's crude output.”
El Zayat also said: “Still the group’s suicide missions can target Iraq’s oil infrastructure, whether it be the pipeline network, three biggest refineries in the South and/or the export terminal of Basra. The IEA concerns are legitimate and coupled with the suppressed current prices make investment in oil capacity an illogical proposition.”
Tazeem Anwar, senior financial analysts at Zughaibi & Kabbani Financial Consultants, Jeddah, said: “As a source of energy no one can deny that oil has become an essential element of everyday life. In absence of any perfect alternative, it is inconceivable that the worth of such important factor may be equal to its production cost. If possible, it can be the maximum outcome of oil price collapse. And better for producer countries to keep oil as reserves rather to sell it at a loss.”
He said: Oil prices went extra high over the past few years and a correction was due. The producers attempted to adjust it in terms of a price discount but oversupply in addition to booming US shale oil output intensified the degree of adjustment up to 50 percent (too much).”
Tazeem said: “This dramatic reduction in oil revenues obviously impacts GDP growth of Gulf region but within moderate limits. As governments’ strong financial positions, high public spending and low government debt continue to drive a favorable macroeconomic outlook for GCC countries. Particularly, Saudi Arabia’s fairly large foreign exchange reserves as a percentage of GDP protect from such negative impacts.”
The Gulf region has absorbed the major dent up to 50 percent in oil revenues. “We believe that oil has established a firm floor at $50 per barrel, which is likely to last in the long term. Things are moving toward normality, the recent discovery in oil prices to $60 can be another floor. It will take time yet to get out of the situation entirely, may be in months or years,” Tazeem added.