 "Why no deal in Doha is bad news for equity markets")
One of the reasons global equity markets, especially emerging markets, steadied was on account of oil prices stabilising after touching multi-year lows of near $25 a barrel. Oil prices, in turn, paused and moved higher on news of production freeze by some major oil producers. Michael O’Rourke, chief market strategist at Jones Trading, said that crude’s rally this year was not due to rising demand but rather fuelled by ‘repeated speculation that a deal for a production cut would be reached in Doha’.
With oil markets settling down, withdrawal from emerging markets ETF, believed to be mainly from oil producing countries subsided. But will the current chain of events revive a withdrawal of money from the market?
Oil prices rose by nearly 50% from their lows in February after Russia, Saudi Arabia, Qatar and Venezuela agreed to freeze output provided other producers were willing to join in. This led to some hope that sanity might prevail in the oil market. Oil markets had seen a sharp decline in prices after Saudi Arabia decided to take the shale revolution in the US head-on by increasing production and bringing down prices to levels which were lower than cost of production of shale oil.
But the resultant outcome of the supply war saw many oil producing countries being hit on account of lower oil prices. As most of these economies are dependent primarily on oil they needed to pump more oil in the market to meet their spending requirements. Most of the population in these economies had not known what a recession looks like; woke up to rude shocks when they saw taxes being imposed and prices being raised on goods which were free a few months back.
Wage cuts, which were unheard of in the West Asia since the oil boom, have been introduced. Over the weekend oil workers in Kuwait went on a strike to protest the plans to cut wages and benefits.
It was on the background of this turmoil that oil market was looking with some hope at the meeting in Doha. But strategically the Americans opened another front for the Saudi’s to fight by removing the ban on oil production with Iran. In the meeting in Doha, even a production freeze at January levels, let alone a production cut could not be achieved because Iran, the second largest oil producer in the oil cartel refused to attend the meeting.
In a meeting that was attended by Saudi Arabia, Russia, Kuwait and other OPEC (Organisation of Petroleum Exporting Countries) members, but not Iran, could not reach a decision as Saudi Arabia insisted that there could be no agreement unless Iran froze production too. But Iran wants its production level to reach the pre-ban levels before it would agree on the freeze.
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Many experts in the market did not expect any headway in the Doha meet and were betting on a demand pull to revive the oil market. But latest growth forecast does not show any signs of global economy reviving. In fact lower oil prices have hit other energy markets too. Crash in coal prices lead to one of the biggest names in coal industry – Peabody Energy filing for bankruptcy.
As tough the oil supply war was not enough, Saudi’s are being confronted from another front by the Americans. A bill in the USA is up for discussion on Saudi Arabia’s role in 9/11 attacks on the USA. Foreign minister of Saudi Arabia Adel al-Jubeir delivered the kingdom’s message personally to Washington that his country would be forced to sell up to $750 billion in treasury securities and other assets in the US before they could be in danger of being frozen by American courts.
Not only would this affect the Saudi-American fragile relationship off-late, especially in a very vocal election year, but it could also affect both the oil and currency markets. Saudi Arabia as part of an agreement with the USA sells its oil in dollar denominated currency, any further friction can be ruinous if the country decides to stop dealing in dollar which would result in less demand for the greenback. Thankfully, America President Obama will be visiting Saudi Arabia on Wednesday, which many feel will cool temper between the two nations.
Irrespective of the outcome of the meeting between Saudi and Americans, oil prices have very little to look forward to. Natixis oil analyst Abhishek Deshpande said “With no deal today, markets' confidence in OPEC's ability to achieve any sensible supply balancing act is likely to diminish and this is surely bearish for the oil markets, where prices had rallied partly on expectations of a deal. Without a deal, the likelihood of markets balancing is now pushed back to mid-2017. We will see a lot of speculators getting out next week," said Deshpande, who added that prices could fall close to $30 per barrel.
If oil prices start falling, equity markets will feel the pressure again as oil producing countries would again dip into their savings to fund their deficits.