Oil price blues will dent regional business confidence

When the oil price topped out at $78 a barrel on July 18th last year few commentators would have predicted a 31 per cent fall in the oil price to where it stands today.

Unseasonably high temperatures are part of the explanation with a warmer January in New York than in Dubai, and consequently a lower demand for heating oil. A slowing global economy after a string of interest rate hikes is another.

The problem is that trends tend to extend. In the case of oil the market has only just broken through its 200-day moving average, and once that happens on a graph then technical analysts note that the downward plunge is usually dramatic.

Oil could dip to $34 a barrel or back to its long term mean of $24 - not necessarily for long but long enough to shake Gulf business to the core.

Oil price shock

Who can forget the nightmare of oil under $10 a barrel in the late nineties when Opec foolishly increased output in the face of the Asian Financial Crisis?

This time Opec looks under better management but the power of the cartel may be sorely tested by demand factors accentuated on the downside by the hedge funds which will sell the market down.

Yet the rebound in oil prices, when it comes, will probably be equally as sharp. A glance around the world today reveals a plethora of geopolitical incidents waiting to happen. But something will have to actually happen - the markets have tired of hypothetical oil supply crises, they will have to see one before adjusting the price again.

It does not need much imagination to think of the sort of incident that would interrupt crude oil supplies and send prices soaring upwards. However, the trend right now is inexorably downwards and as we saw last May this sort of energy shock impacts on equity markets and hedge funds with a domino effect.

Severe correction

AME Info's most celebrated columnist Dr. Marc Faber has this week gone on the record as saying he expects a severe global asset price correction within the next few months. In this climate oil prices will not so much drift lower as plummet in a downwards direction.

In the Middle East local business is just coming to terms with the impact of the stock market crashes of 2006, and the banks will shortly be reporting dismal fourth quarter results. Oil price weakness will compound these factors and depress business confidence further.

Whether local real estate markets can withstand the impact of lower oil prices on top of the stock market falls is open to question, and it could be that this is the next area to experience asset price weakness due to falling liquidity.