A general view of the Baiji oil refinery in Iraq. Reuters
A general view of the Baiji oil refinery in Iraq. Reuters

Business

Iraq is willing to jump over $100 psychological barrier

Iraq, eager to rebuild after years of conflict, is targeting an oil price between US$100 and $120 a barrel. 

April Yee

June 08, 2011

VIENNA // Consumers baulk at oil prices above the psychological barrier of US$100 a barrel, and the world's top crude exporter, Saudi Arabia, declares its ideal price lies below that. Not so Iraq.

Between $100 and $120 is just dandy, according to the country's oil minister Abdul Kareem Luaiby. It is easy to see why, given the $7 billion (Dh25.71bn) Iraq says it took in from oil exports last month alone. "The current price is not too high," he said. "There are many economists worldwide who suggest that the current level does not hurt the world economy."

The minister was in Austria for today's Opec meeting, expected to be the most contentious for years as the organisation that controls more than 40 per cent of the world's oil supply meets for the first time since unrest began spreading across the Middle East.

Concern about potential supply disruptions, actual cuts from Opec member Libya and the nuclear disaster in Japan have sent the price of oil up to $127 in recent weeks. Brent crude, the European benchmark, was trading at $115 yesterday.

In the days leading up to the meeting, Opec members have aligned themselves into two camps: those who believe it should increase output to curb prices and sustain the global economic recovery, and those who do not.

Iraq appears to side with the latter. By contrast, King Abdullah of Saudi Arabia, the world's petroleum superpower, declared $75 to be a fair price for oil in 2008 and has stuck to that target since.

Iraq has a unique position among Opec nations, with the right to provide input at meetings but without any obligation to stick to a quota. It is at least a couple years away from coming under the system that caps the official production of members under a collective ceiling at 24.8 million barrels a day (bpd), analysts say.

Until then Iraq can continue pumping as much as it can to attract the foreign investment required to develop new fields and export facilities. Recently it hit output of 2.7 million bpd.

Luckily for the rest of the world, Iraq's line on prices appears to be in a minority. The GCC, which constitutes the most powerful lobby within Opec, is pushing to bring prices down. Analysts expect the GCC to win the day.

"Led by the GCC, Opec is likely to increase production because the market needs more oil," said Gary Ross, the chief executive of PIRA Energy, a New York consultancy.

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Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.

Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.

“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.

Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.

“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.

Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.

From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.

Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.

BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.

Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.

Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.

“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.

Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.

“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.

“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”

The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”