Oil prices had a volatile day, prompted by competing influences from rising Saudi Arabia-Iran tensions and further evidence of economic slowdown in China.
The benchmark North Sea Brent crude futures contract gained more than 3 per cent early on to US$38.50 per barrel, but retreated to stand as low as $37.03 before rising again. In late afternoon trading Arabian Gulf time on Monday it was up 2 per cent at $38.03.
The market sentiment was swayed by news of rising tensions between Saudi Arabia and Iran after the execution of a Shia cleric in the kingdom was followed by a storming of the Saudi embassy in Tehran.
Saudi Arabia, followed by Bahrain and the UAE then downgraded diplomatic relations with Iran.
The influence of those events on the market was later tempered by reports that indicated China’s economy was slowing.
Although the volatility was heavy during the session, the price move wasn’t great in the context of the market’s overall bearish tone.
Brent futures prices have been ratcheting down since summer 2014’s high above $115 a barrel to average in the high $50s in the early part of last year, then down again sharply after the summer when it became clear there would be no quick relief to the world’s oil glut.
Prices hit a fresh 11-year low just a week ago at $36.11.
The futures market ended last year with very large positions by speculators betting on further losses, which makes it vulnerable to a sharp rise if there is any unexpected disruption to supply. But analysts said the fundamental position remains unchanged – that the oversupply looks likely to continue through at least the early part of this year before world oil inventories stop building later in 2016.
The data from China on Monday, showing the widely watched Caixin/Markit China Manufacturing Purchasing Managers’ Index (PMI) fell to to 48.2 last month, from 48.6 in November, when surveyed analysts showed they were looking for a rise to 49.
It was the 10th straight month of shrinking manufacturing and added to the worries that China’s slowing economy would lead to lower demand for oil and other commodities.
“The oil rally clearly has nothing to do with fundamentals,” said Hussein Al Sayed, the chief market strategist in the Middle East for IG, the market spread play outfit.
“The Saudi-Iranian conflict didn’t reach a stage to threaten supplies through Strait of Hormuz,” he said. “Status can be described as still in a Cold War situation, although looking to be somehow hotter in the past 48 hours, otherwise at least 10-15 per cent would be priced as risk premium.”
On the other hand, the Chinese data “will continue to remind investors of the risks of emerging markets slowdown into 2016”, Mr Al Sayed said.
The dominance of the fundamental supply-demand situation was underlined by the head of BP, Bob Dudley, in an interview at the weekend.
While loath to predict oil prices, Mr Dudley said the likely scenario this year is “I think a low point could be in the first quarter – a number with a three in front of it, $30s is probably right. And then the natural supply-and-demand balances come back in third, fourth quarter of 2016, and then the stock levels start wearing off.”
The view reflects what most analysts expect for the year ahead.
amcauley@thenational.ae
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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.”
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