Given the ongoing political controversy in the international community, the Saudi oil and stock markets have been undergoing a rollercoaster of erratic prices. Opinions in the international community are divided, with some believing that the oil market could take a major hit as producers peak their prices, while others believe that the oil market will be well and good, and that concerns will be alleviated by increased output from the oil producers across the globe.
So, which is the case? We look at both perspectives, and what they think will happen to the stock and oil market.
Tadawul makes a recovery
The fallout to the political controversy that is in the news has caused Saudi Arabia’s stock market to plunge on Sunday as investor’s continued their show of concern, Reuters reported.
“After nearly two hours of trade the index was down 7%, its biggest drop since December 2014, when oil prices were crashing,” they continued. “Shares in the region’s biggest petrochemical producer, Saudi Basic Industries, tumbled 7.9%.”
(Tadawul Index over the period of Monday 8/10/2018 to Tuesday 16/10/2018)
On Monday October 8, the Index closed at 7,939.17, taking a plunge on Sunday October 14 to 7,266.59, marking an 8.47% drop.
However, the Index has made a recovery from a close of 7,266.59 on Sunday to a close of 7,666.80 on Tuesday, indicating a return to form as the Index stabilizes. This change represents a 5.5% increase.
(Table – Dubai Financial Market General Index over the last 7 days)
(Graph – Dubai Financial Market General Index over the last 7 days)
The Dubai Financial Market General Index suffered a similar dip last week, but has also made a recovery.
Foreign investment could be deterred as well, as investors abroad fear risking a financial commitment. In similar cases of political uncertainty, panic selling is not an uncommon reality in the market.
The negative outlook
CNBC reported that analysts are warning there could be fallout for global oil markets.
“Other stock markets in the Gulf opened higher on Sunday but began falling as Riyadh plunged, with the Dubai index sinking 1.4%,” Reuters reported.
Robert Carnell, chief economist head of research at ING, said the incident “opens a new source of risk.”
“Oil prices rose on Monday afternoon during Asian trade, with Brent crude jumping 1.29% to $81.47 per barrel, and U.S. crude futures rising 1.14% to $72.15 a barrel,” CNBC noted.
Michael Heise, chief economist at Allianz, told the American TV channel that “if the oil price continues to react in an upward direction… that affects many markets, also many emerging markets in Asia, which are net importers of oil. I think that is the most important transmission channel of this crisis”
This political situation has arisen at a difficult time, one month before the rest of the US sanctions on Iran go into effect, which will lead to the loss of Iran’s contribution to the international oil supply.
Jeff Mower, Director of U.S. Oil News for S&P Global Platts, told CNBC that the “sanctions will lead to a drop in around 1.7 million barrels a day from the market by the end of the year.”
Saudi Arabia supplied 10.53 million bpd (barrels per day) in September, up 50,000 bpd, a Reuters survey found.
CNBC writes that this equals to more than 10% of global crude demand.
The positive outlook
Other parties, however, believe that there is no need for concern.
Jameel Ahmad, Global Head of Currency Strategy & Market Research at FXTM, said: “While there is some concern over how a new potential element of geopolitical risk could weigh on financial markets, it is important for investors to not get too carried away and jump heavily to conclusion on how various asset classes could be impacted, until there is necessary clarity on the situation.”
“It is very premature and risks not being accurate to suggest that the price of oil could jump beyond $100 – that there is a threat of sudden capital outflows,” he continued.
“It goes without saying that a 7% decline in any stock market will never make for a favourable headline, but I wouldn’t rule out the potential of Saudi Arabian markets recovering these losses if tensions do not further escalate after the comments made over the weekend.”
Ahmad is talking about the easing tensions surrounding the controversy, as Saudi and Turkey have formally agreed to open an investigation.
Worldwide, some parties are showing diminishing concerns.
NBC notes that the International Energy Agency (IEA) said the market looked “adequately supplied for now” and cut its forecasts for world oil demand growth this year and next.
OPEC, Russia, and other oil producers, such as U.S. shale companies, had increased production sharply since May, the IEA said, raising world crude output by 1.4 million barrels per day.
“Shale oil production continues unabated in the US,” said Carsten Fritsch, an analyst at Commerzbank AG in Frankfurt.
With the US confident in its production numbers, it seems they’ll be able to provide for themselves in anticipation of further market fluctuations.