Drop in oil prices unlikely to affect bourses in Gulf

Gulf stock markets are not expected to be affected by the decline in oil prices despite its negative psychological impact on investors, analysts said yesterday.

Although the drop of nearly 20 per cent in oil prices from their peak level of about $150 last month means a sharp fall in the revenues of the six-nation Gulf Co-operation Council (GCC), prices are still more than double their level forecast in the 2008 budgets of member states, they said.

"I cannot see any strong direct effect of the decline in oil prices on regional markets because despite the large fall, oil prices are still much higher than had been budgeted by the GCC," said Hammam Al Shamaa, a financial analyst at Abu Dhabi-based stockbroker Al Fajr Securities.

"This means the decline will not have a major impact on the domestic liquidity and financial flows into the GCC countries, which have projected oil prices of less than half the current level. The drop could have a small psychological effect but has nothing to do with the recent bourse declines. Minor investors are not affected by such developments while some portfolios could be preparing for certain possibilities but I can't see any major impact of lower oil prices."

The seven bourses in the GCC, including two in the UAE, have remained erratic this year despite an ongoing economic boom in the region and strong performance by most of the nearly 650 listed companies.

Analysts have cited many reasons for the volatility, including profit-taking sales, a decline in some major shares, widespread market rumours, foreign sell-offs and geopolitical factors such as heightened tension between the US and Iran.

But most of them have discounted any real effect of the oil price change on the bourses as this was evident in the sharp fall in some bourses over the past three months at a time when oil prices climbed to historically high levels.

"The oil price factor has to be taken into consideration in any financial and economic development in the GCC but the recent decline does not mean the region's bourses should retreat," said Mohammed Al Asumi, a Gulf economist.

"It was a steep decline but it will not affect the GCC fiscal balance at all. On the contrary, the GCC budgets will record large surpluses as all of them have projected very conservative prices of as low as $40 a barrel when prices are still above $100. Gulf stock markets could be impacted when there is a price crash, which is unlikely at this stage."

In Saudi Arabia, the world's oil superpower, the oil price fall has had a minor psychological effect on investors as the bourse has just started to recover from a brief shock caused by this month's decision by market regulators to unveil the names of major investors who own at least five per cent of the listed shares.

"The continuous drop in crude oil prices turned the market sentiment downwards," said Saudi National Commercial Bank. But the bank said the market, the largest and busiest in the Middle East, had overcome that shock and was expected to continue its recovery.

"Although the market seems oversold on negative sentiment, the index is now developing a bullish momentum that we believe will bring some recuperative rally in the coming sessions. From the technical perspective, it will face a strong support level at 7,600 points on the down cycle while the up cycle resistance exists at 8,500 points for August," it said. "In our opinion, a market capitalisation of SR1,590 billion suggests that the level of prices is approaching a fair-value status."

In Oman, Alwatan Arabic daily said receding oil prices had not affected the Muscat Securities Market on the grounds Oman had assumed a price for its crude of about $45, below half their present levels.

Quoting local financial analysts, it said the market had also not been influenced by the recent surge in the dollar. "Even if oil prices plummeted to $70-80, this will not have a major impact on investors as the Sultanate has projected an oil price of $45 for its 2008 budget. As for the strengthening of the US dollar, this should be considered a positive factor because the Omani rial is pegged to the dollar and any rise in the dollar's rate will boost the value of the rial."

GCC bourses have sharply fluctuated this year, with their combined market capitalisation surging from nearly $1,095bn at the start of 2008 to $1,170bn on June 1. It dipped to $1,142bn at the end of June and continued its decline to reach $1,116bn at the end of July and $1,056bn on August 15, one of its lowest levels in 2008.