Monday, December 7, 2015

Gulf markets hit as US crude drops to $38; Japan avoids technical recession; When to turn off the taps is Saudi Arabia's $640bn question

1 Gulf markets hit as US crude drops to $38 (Siddesh Suresh Mayenkar in Gulf News) Post the Opec indecision on output ceiling, oil prices continued its southward journey with WTI falling below the keenly-watched $40 per barrel mark, and the sell-off spread to equity markets in the Gulf, with Dubai leading the losses.

The Dow Jones industrial average gave up 154 points, or 0.9 percent, to 17,694 on Monday. The S&P 500 index slipped 19 points, or 0.9 percent, to 2,072 while the Nasdaq composite fell 38 points, or 0.7 percent, to 5,105.

Oil dropped 5 percent to $38 a barrel, near its low for the year. Brent crude prices, the globally traded benchmark, traded down $1 to below $42 a barrel, the lowest since March 12, 2009.

“It is the aftermath of Opec’s decision, the fear is that we will have a lot more supply in the market and there is no one on the other side to pick this one up and hence the price will continue its downward path,” said Naeem Aslam, Chief Market Analyst, Global Head of Analysis at Ava Trade.

Equity markets in the Gulf, which is considered as a proxy for oil, came under intense selling pressure with the exception of the Abu Dhabi index. Dubai index led the losses. The Dubai Financial Market General Index closed 2.21 per cent lower at 3,104.17, after hitting a low of 3,102.25, the lowest level in 2015.

2 Japan avoids technical recession (BBC) Japan's economy avoided a technical recession in the three months to September, according to revised official numbers released on Tuesday. Preliminary numbers released last month showed the economy had contracted an annualised 0.8% during the period.

The preliminary figures meant it was Japan's second consecutive quarterly contraction, which constitutes a technical recession. However, the revised figures show the economy expanded at an annualised 1%. Japan, which is the world's third-biggest economy, has been in recession four times since the global financial crisis.

On a quarterly basis, the latest economic numbers show gross domestic product (GDP) for the three months to September grew 0.3% - instead of initial report which showed a contraction of 0.2%.

Economist Marcel Thieliant of Capital Economics said one reason for the revision was stronger business investment, which edged up by 0.6% instead of the preliminary reported 1.3% quarter on quarter fall.

3 When to turn off the taps is Saudia Arabia’s $640bn question (Nils Pratley in The Guardian) So much for the idea that the US shale industry would be killed by Saudi Arabia’s high-risk strategy, adopted a year ago, of keeping Opec’s taps open and flooding the market with supplies. After 12 months of this experiment, it is Opec that is in chaos.

Meanwhile, US oil production has barely been dented. Volumes have fallen 5% in the past six months, but the backdrop was a shale-driven 50% increase in production between mid-2012 and mid-2015. In short, the Saudis have gained next to nothing.

No wonder the price of Brent crude now stands at a near seven-year low of $41 a barrel. And no wonder last week’s meeting of the Opec cartel ended in chaos. The Saudis don’t trust the Iranians to cut production, and thus the outcome was stalemate.

The Saudis seem to have made the oldest mistake in the book. The theory that an intense period of low oil prices, say $50, would drive US shale and some conventional oil producers out of business was plausible on paper. But it overlooked the practical evidence of many decades that, in oversupplied commodity markets, producers try to stay in business to the bitter end.

The low oil price is great news (at least for the time being) for oil-consuming countries. But when, like the Saudis, you require $100-a-barrel oil to balance your budget, you have a serious problem. Even foreign-exchange reserves of $640bn don’t last forever.                                                                                                                            

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